Income Criteria for Bank Statement Loans
Income Criteria for Bank Statement Loans | Borrower Eligibility and Income Documentation Requirements
Income Criteria for Bank Statement Loans defines how lenders evaluate and qualify borrowers whose financial situations do not align neatly with conventional lending standards. Bank Statement Loans are designed primarily for self-employed individuals, independent contractors, freelancers and small business owners.
A. Target Profile and Purpose
The need for BSLs arises because self-employed borrowers often utilize legitimate tax deductions and business write-offs that intentionally minimize their taxable income on federal returns, making qualification challenging under traditional mortgage standards.
B. Core Eligibility Requirements
- Employment Status: At least one borrower must derive their primary income from a self-employed activity. The BSL program is specifically for borrowers with an active, U.S. based business that is generating stable revenue.
- Ownership: The self-employed borrower must have an ownership interest in the business of 25% or greater to utilize business income. Some programs permit a minimum of 20% ownership if personal statements are used with evidence of a business bank account.
- Business History: Borrowers must generally have been self-employed in the same business for a minimum of two years. However, borrowers with less than two years (but at least one year) may be eligible if they document two years of previous experience in the same line of work and provide an additional six months of reserves.
C. Documentation Requirements
- Statements: Lenders require 12 or 24 months of complete and consecutive bank statements from the same account. These statements should be the most recent available, often required within 60 days of the note date.
- Tax Documentation: Tax returns and Form 4506-C are explicitly NOT required for the BSL program. If tax returns or transcripts are provided in the file, the loan is rendered ineligible for the Bank Statement product.
Income Calculation Methodology
The income calculation converts eligible deposits into a stable, imputed net monthly income. The qualifying income used is the lower of the eligible deposit average or the monthly income disclosed on the initial signed loan application (1003).
A. Personal Bank Statement Income
When using personal bank statements, the focus is exclusively on the transfers from the active business:
- Eligible Deposits: Only transfers or deposits received directly from the borrower’s business account(s) are considered eligible income.
- Ineligible Deposits: Transfers between personal accounts are ineligible.
- Business Verification: The borrower must provide the most recent two months of business bank statements to confirm that the deposits originated from the owned business and that separate accounts are maintained.
- Calculation: The total eligible deposits are summed and divided by the number of months of statements (12 or 24).
B. Business Bank Statement Income and Expense Ratios
When using business bank statements, a deduction for business expenses (an expense ratio) must be applied to the gross deposits to arrive at the net qualifying income.
| Calculation Method | Criteria and Application |
| 1. Fixed Expense Ratio | A fixed ratio of 50% is the standard deduction for most business types. Any loan with an LTV greater than 85% is typically required to use the 50% fixed expense factor. |
| 2. Third-Party P&L | Net income is determined from a Profit & Loss (P&L) statement prepared by a CPA, EA, or licensed tax preparer (PTIN), covering the same period as the bank statements. Eligible deposits on the bank statements must generally be within a 15% tolerance of the gross revenue listed on the P&L. |
| 3. Third-Party Expense Ratio | A CPA/EA/PTIN provides a letter certifying the business’s actual expense ratio. The minimum allowable expense ratio for qualification is 20%. |
C. Co-Mingled Accounts
Accounts that reflect both personal and business activity (co-mingled accounts) are treated as business bank statements for income determination, meaning an expense factor must be applied.
- Eligible Deposits: Only transfers or deposits received directly from the borrower’s business account(s) are considered eligible income.
- Ineligible Deposits: Transfers between personal accounts are ineligible.
- Business Verification: The borrower must provide the most recent two months of business bank statements to confirm that the deposits originated from the owned business and that separate accounts are maintained.
- Calculation: The total eligible deposits are summed and divided by the number of months of statements (12 or 24).
Income Consistency and Exclusion Rules
Underwriters scrutinize statements for stability and exclude deposits that do not represent reliable business income.
A. Ineligible Deposits
Ineligible deposits include, but are not limited to: transfers between accounts (except business to personal), refunds (e.g., tax refunds), loan proceeds/advances, payroll deposits from other income sources, and any recognizable non-business-related deposit.
B. Large Deposits and Sourcing
- Large Deposits (often defined as those exceeding 50% of the average monthly deposits) must be documented with a Letter of Explanation (LOE) and must be consistent with the business profile. If the LOE is sufficient, additional sourcing may not be required.
- ATM deposits may be included if a consistent pattern of deposits is present.
C. Declining Income Trends
- If the trend of deposits is declining and has not stabilized, the income may not be used.
- A decline defined as 25% or more in the most recent three months of eligible deposits versus total eligible deposits requires a satisfactory LOE.
- 24 months of statements are utilized and the deposits are declining year over year by more than 10% (for DTI > 36%) or 20% (for DTI ?36%), the income is ineligible for qualification. In cases of acceptable decline, the most conservative income calculation (often the most recent 12-month average) should be used.
- Borrowers must provide a written explanation for any declining income.
Supplemental Income Sources
The income calculated via bank statements must be the borrower’s primary income source (typically >50% of qualifying income). Other income can be used to supplement the Bank Statement income:
- Co-Borrower Income: Full documentation from a co-borrower who is not self-employed may be used to supplement the BSL income. W-2 transcripts are required for the wage earner, but the primary self-employed borrower must not provide tax returns.
- Fixed Income: Supplemental income sources such as Social Security, Pension, Alimony, and Child Support may be used. Non-taxable income from these sources may be grossed up by 25% for qualifying purposes. These sources must be expected to continue for a minimum of three years.
- Rental Income: Rental income from investment properties can be used if it is documented in a separate bank account than the one used for the BSL income. The income is typically calculated as 75% of the current lease income less documented PITIA.
- 1099 Income: Borrowers paid by multiple 1099s are considered self-employed and must be qualified using 12- or 24-month bank statements. Borrowers receiving 1099 income from a single source may be considered under separate 1099-Only guidelines, often requiring a 10% expense factor.
- Asset Utilization: Asset Utilization (or Asset Depletion) can be used as a supplemental income source alongside BSL income, but the maximum DTI is typically capped at 45% in this combined scenario. However, Asset Depletion cannot be combined with bank statement loans (personal or business) in the Prime Non-QM Series guidelines. The BSL program is generally ineligible if the income is derived only from passive or portfolio sources, which makes it unsuitable for a typical retiree.
FAQ's
Borrowers who only receive income from passive or portfolio sources are ineligible. Ineligible sources include distributions from limited partnerships, property flipping activities, and Gift funds.
Yes, net income can be determined from a P&L statement prepared by a qualified third-party (CPA, EA, or licensed tax preparer/PTIN), provided it covers the same period as the bank statements. Some programs require a minimum expense ratio of 20% to be reflected.
If the deposit trend is declining and has not stabilized, the income may not be used. If a decline of 25% or more in the most recent three months is noted, a satisfactory Letter of Explanation (LOE) is required.
Borrowers must generally have been self-employed in the same business for the last 2 years. However, a history of less than two years (but at least one year) may be acceptable if the borrower documents two years of previous experience in the same line of work and provides additional reserves.
No. Tax transcripts are NOT required on Bank Statement. If tax returns and/or transcripts are provided in the loan file, the loan will be rendered ineligible for the Bank Statement Product.
Only transfers or deposits received directly from the borrower’s business account(s) are considered eligible deposits for personal bank statement analysis. Transfers between other personal accounts are ineligible.
When using business bank statements, a Fixed Income Expense Ratio of 50% is the standard deduction for most business types. This ratio is applied to the gross eligible deposits to calculate net income.
Lenders generally require 12 or 24 months of complete and consecutive bank statements. These statements should be provided within 60 days of the note date.
The self-employed borrower must have an ownership interest of 25% or greater in the business entity. Some programs permit a minimum of 20% ownership if personal bank statements are used with evidence of a business bank account.
The program is designed for self-employed individuals, independent contractors, freelancers, and small business owners, specifically those with an active, U.S. based business that is generating stable revenue.
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