When seeking financing, entrepreneurs and business owners inevitably face the “bank statement loan vs conventional loan” question.
Choosing the right mortgage product can make or break your home financing experience, especially if you’re self-employed or have non-traditional income.
Two popular options – bank statement loans and conventional loans – serve very different borrower profiles.
Understanding the key differences, advantages, and requirements of each will help you make an informed decision that aligns with your financial situation. Luckily, we here at Defy are experts at all things mortgage.
We’ll make sure you understand the ins and outs of each type before you make your decision.
What Are Bank Statement Loans?
Bank statement loans are alternative mortgage products designed for borrowers who can’t provide traditional income documentation like W-2s or pay stubs. Instead of relying on tax returns, lenders evaluate your income based on deposits shown in your personal or business bank statements over a 12-24 month period.
These loans fall under the non-QM (Non-Qualified Mortgage) category, offering flexible underwriting guidelines that consider your actual cash flow rather than what appears on your tax returns. This makes them particularly valuable for self-employed borrowers, business owners, and entrepreneurs whose tax strategies may minimize reported income.
What Are Conventional Loans?
Conventional loans are traditional mortgage products that conform to guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac. These loans require extensive income documentation, including W-2s, pay stubs, tax returns, and employment verification letters. Borrowers must meet strict debt-to-income ratios and demonstrate consistent, verifiable income history.
Conventional loans represent the majority of mortgage originations and offer standardized terms, competitive interest rates, and well-established approval processes. However, their rigid documentation requirements can create significant barriers for borrowers with non-traditional income sources.
As you can probably tell, business owners and entrepreneurs regularly confront the “bank statement loan vs conventional loan” question when evaluating their financing alternatives. Many business owners make write-offs that significantly lower their adjusted gross income and make it difficult to qualify for a loan that would suit their lifestyle.
Bank Statement Loan Advantages
Flexible Income Verification: The primary advantage of bank statement loans is their acceptance of alternative income documentation. If your bank deposits tell a different story than your tax returns, these loans can unlock financing opportunities that conventional products can’t provide.
Self-Employed Friendly: Entrepreneurs and business owners often write off significant expenses, reducing their taxable income but also their qualifying income for conventional loans. Bank statement loans evaluate your gross deposits, providing a more accurate picture of your earning capacity.
Faster Approval Process: Without the need for extensive employment verification and income documentation, bank statement loans can often move through underwriting more quickly than conventional products.
Multiple Property Types: Many bank statement loan programs support primary residences, second homes, and investment properties, offering versatility for different real estate strategies.
Higher Loan Amounts: Some programs, like those offered by specialized lenders, can accommodate higher loan amounts than conventional products, particularly for jumbo loans in expensive markets.
Bank Statement Loan Disadvantages
Limited Lender Options: Fewer lenders offer bank statement loan programs compared to conventional products, potentially limiting your shopping options.
Occasionally Higher Interest Rates and Down Payments: Bank statement loans can carry interest rates 0.25% to 1.00% higher than comparable conventional loans, and the same with higher down payments, often 10-25% compared to conventional loans that may accept as little as 3% down.
Fees: Although not always, origination fees and closing costs may be higher for bank statement loans compared to conventional products.
Conventional Loan Advantages
Lower Interest Rates: Conventional loans typically offer the most competitive interest rates available in the mortgage market, particularly for borrowers with excellent credit.
Lower Down Payment Options: Many conventional loan programs accept down payments as low as 3-5%, making homeownership more accessible for first-time buyers.
Wide Lender Availability: Nearly every mortgage lender offers conventional loan products, giving borrowers extensive shopping options and competitive pricing.
PMI Removal Options: Private mortgage insurance on conventional loans can be removed once you reach 20% equity, unlike some government loan programs where mortgage insurance is permanent.
Conventional Loan Disadvantages
Strict Documentation Requirements: The extensive documentation requirements can be challenging for self-employed borrowers, those with variable income, or anyone with non-traditional employment situations.
Rigid Debt-to-Income Ratios: Conventional loans typically require debt-to-income ratios below 43-50%, which can disqualify otherwise qualified borrowers with higher debt levels.
Employment Verification: Lenders require consistent employment history, typically two years in the same field, which can exclude career changers or entrepreneurs.
Limited Flexibility: Underwriting guidelines leave little room for unique situations or alternative income sources that don’t fit standard categories.
Defy Mortgage’s Bank Statement Loan Program
At Defy Mortgage, we offer comprehensive bank statement loan solutions designed to meet diverse borrower needs.
Bank Statement Loan Requirements
Bank Statement Loans
- LTV: Up to 90% pending meeting additional requirements
- FICO: 620 minimum
- Max Loan Amount: $6M
- Terms: ARM/Fixed options
- Property Types: All residential (1-4 units)
- Documentation: 12-24 months of bank statements – personal or business
- Interest-Only Options: Available for enhanced cash flow flexibility
- Reserve Requirements: 3 months of mortgage payments
- Loan Purposes: Purchase, rate/term refinance, and cash-out refinance
- Processing Speed: Can close in as little as 2 weeks
- Highlight: No tax returns required, up to 24-month terms available
- No Obligation Application: Apply with no fees or obligation
Bank Statement Loan vs Conventional Loan: Choosing the Right Loan for Your Situation
The decision between bank statement loans and conventional loans depends on your specific circumstances:
Choose a Bank Statement Loan if:
- You’re self-employed with significant business write-offs
- Your tax returns don’t reflect your true earning capacity
- You have irregular income but strong cash flow
- You need financing for investment properties
- You want interest-only payment options
- You need to close quickly
Choose a Conventional Loan if:
- You have traditional W-2 employment
- Your tax returns accurately reflect your income
- You prefer minimal down payment requirements
- You have straightforward financial documentation
Alternative Lending Solutions
This article tackles two options: “bank statement loan vs conventional loan,” but there are other specialized products that might fit your needs:
Interest-Only Loans: Perfect for borrowers who want to maximize cash flow flexibility. These loans allow you to pay only the interest portion for a specified period, reducing monthly payments and freeing up capital for other investments or business needs.
P&L (Profit & Loss) Loans: P&L loans use profit and loss statements prepared by a CPA to verify income, ideal for established business owners with clean financial records who want to showcase their business profitability.
DSCR (Debt Service Coverage Ratio) Loans: DSCR loans are perfect for real estate investors who want to qualify based on property cash flow rather than personal income. These loans focus on the rental income potential of investment properties.
Asset Depletion Loans: Designed for borrowers with substantial liquid assets but limited traditional income documentation. These loans calculate qualifying income based on your liquid assets, making them ideal for retirees, investors, or individuals with significant savings and investment portfolios.
Bank Statement Loan vs Conventional Loan: Making Your Decision
The mortgage landscape offers numerous paths to homeownership and real estate investment. While conventional loans work well for traditional borrowers, bank statement loans open doors for entrepreneurs, self-employed professionals, and investors whose financial situations don’t fit standard molds.
The key is working with a lender who understands your unique circumstances and can guide you toward the most appropriate financing solution. At Defy Mortgage, we specialize in creative financing solutions that adapt to your needs rather than forcing you into predetermined categories.
Frequently Asked Questions
What credit score do I need for a bank statement loan? Most bank statement loan programs require a minimum FICO score of 620, though some programs may accept scores as low as 600 with adjusted loan terms. Higher credit scores typically qualify for better rates and more flexible terms.
How many months of bank statements do I need? Bank statement loan programs typically require 12-24 months of personal or business bank statements. The specific requirement varies by lender and loan program, with most preferring 24 months for the most accurate income assessment.
Can I use bank statement loans for investment properties? Yes, many bank statement loan programs specifically cater to real estate investors. DSCR loans, in particular, are designed for investment properties and qualify you based on the property’s rental income potential rather than your personal income.
Bank statement loan vs conventional loan: Which should I choose? This obviously depends on your individual situation, but if you’ve made tax write-offs that lower your adjusted gross income below the level that would qualify you for a home purchase, bank statement loans are a great option.
Are interest rates significantly higher for bank statement loans? Bank statement loans can carry rates 0.25% to 1.00% higher than conventional loans – but not always. While this represents a premium, the ability to qualify often outweighs the modest rate difference, especially for borrowers who can’t access conventional financing.
What’s the maximum loan amount for bank statement loans? This varies significantly by program and lender. Some programs cap at $1-2 million, while others can accommodate much higher amounts. Defy Mortgage offers programs with loan amounts up to $10 million for certain products.
Can I remove mortgage insurance from bank statement loans? This depends on the specific loan program and investor requirements. Some bank statement loans allow mortgage insurance removal at 78-80% LTV, while others may have different requirements. It’s important to understand these terms before closing.
How long does it take to close a bank statement loan? With proper documentation, bank statement loans can close in 2-4 weeks. Some specialized programs, like our P&L loans, can close in as little as 2 weeks for well-prepared borrowers.
Do I need tax returns for bank statement loans? Most bank statement loan programs specifically don’t require tax returns – that’s their primary advantage. However, some lenders may request them for additional verification, even if they’re not required for qualification.
Can I qualify for a bank statement loan if I just started my business? Most programs require at least 2 years of business operation and self-employment history. However, some lenders may consider shorter business histories with additional documentation or higher down payments.
What documents do I need besides bank statements? While bank statements are the primary income documentation, you’ll still need standard mortgage documents including credit reports, asset statements, property appraisals, and identification. Some programs may also require profit and loss statements or business licenses.
Ready to Explore Your Mortgage Options?
Many self-employed individuals and business owners wrestle with the “bank statement loan vs conventional loan” decision.
Whether you’re considering a bank statement loan, conventional financing, or exploring other creative lending solutions, the team at Defy Mortgage is here to help. We specialize in finding the right financing solution for your unique situation, not forcing you into a one-size-fits-all approach.
Our experienced loan officers will review your financial situation, discuss your goals, and recommend the best mortgage products to meet your needs. With access to conventional loans, bank statement products, DSCR loans, and other specialized financing options, we can help you navigate the path to homeownership or real estate investment success.
Schedule your consultation today and discover how Defy Mortgage can help you achieve your real estate goals with financing solutions designed around your life, not the other way around.
