Bank Statement Loans for Low Taxable Income
The Challenge: Why Bank Statement Loans are Necessary for Low Taxable Income
Bank Statement Loans (BSLs) are a fundamental solution within the Alternative Documentation (Alt Doc) space, specifically designed to address the challenges faced by self-employed borrowers whose tax returns do not accurately reflect their capacity to afford a mortgage. Bank Statement Loans for Low Taxable Income borrowers provide a practical pathway for qualified individuals to demonstrate income through bank deposits instead of traditional tax documents, making homeownership more accessible.
Target Borrower Profile:
Self-employed professionals, small business owners, freelancers, and independent contractors represent one of the fastest-growing borrower segments in the mortgage market. These borrowers often encounter loan denial or insufficient qualification under conventional guidelines because:
- Tax Write-offs: Self-employed professionals utilize legitimate tax deductions and business write-offs that intentionally minimize their taxable income.
- Flexible Income: Individuals with irregular or fluctuating income streams (like contractors or freelancers) struggle to prove consistent income via standard tax returns or W-2s.
The Bank Statement Solution: Documentation and Eligibility
The Bank Statement Loan bypasses the use of tax returns by focusing directly on the borrower’s cash flow.
| Documentation Requirement | Standard Criteria |
| Tax Documentation | Tax Transcripts are explicitly NOT required on Bank Statement Loans. If tax returns or transcripts are provided in the file, the loan may be rendered ineligible for the BSL product. |
| Statement Period | Lenders require 12 or 24 months of complete and consecutive personal or business bank statements. These statements must often be dated within 60 days of the note date. |
| Self-Employment History | The borrower must generally have been self-employed in the same business for a minimum of two years. |
| Ownership | To utilize business bank statements, the borrower must have an ownership interest of 25% or greater in the business. For personal bank statements, some programs allow minimum ownership as low as 20%. |
Income Imputation Methodology
Since the BSL uses gross deposits, an appropriate calculation method must be applied to determine the net qualifying income after accounting for estimated business expenses, thus reversing the effect of minimizing taxable income.
A. Income Calculation by Account Type
- Personal Bank Statements: Only deposits received directly from the borrower’s business account(s) are considered eligible income. The income calculation is the total eligible deposits divided by the number of months (12 or 24). The borrower must also provide the most recent two months of business bank statements to verify transfers originated from the business and that separate accounts are maintained.
- Co-Mingled Accounts: If a single account reflects both personal and business activity, it is treated as a business bank statement loan, requiring the application of an expense factor.
B. Expense Ratios for Business Bank Statements
When using business bank statements, a deduction for expenses must be applied to the gross deposits.
| Calculation Method | Criteria and Application |
| Fixed Expense Ratio | A fixed expense ratio of 50% is standard for most business types. The net qualifying income is calculated by multiplying eligible deposits by 50% and then by the borrower’s ownership percentage. |
| Third-Party Prepared P&L | Net income from a Profit & Loss (P&L) statement prepared by an independent CPA, EA, or PTIN licensed tax preparer can be used. The eligible deposits on the bank statements should generally be within a certain tolerance (e.g., +/- 10% or 15%) of the gross income listed on the P&L. |
| Third-Party Expense Ratio | A CPA or licensed tax professional can provide a letter specifying the business’s actual expense ratio. The minimum allowable expense ratio for qualifying is generally 20%. |
C. Ineligible Deposits and Declining Income
Deposits not related to the business’s stable income are excluded from the calculation.
- Exclusions: Ineligible deposits include transfers between accounts (except business to personal), tax refunds, loan proceeds/advances, and gifts.
- Large Deposits: Unusually large deposits (often defined as greater than 50% of the average monthly deposits) must be documented with a Letter of Explanation (LOE) to confirm they are business-related income.
- Declining Income: If the trend of deposits is significantly declining (e.g., a 25% or more decrease in the most recent three months compared to the total eligible deposits), a satisfactory LOE is required, or the income may not be used.
Overall Qualification Standards (Alt Doc)
Bank Statement Loans provide documentation flexibility while maintaining strong standards for credit and debt management.
- Minimum FICO Score: Borrowers should maintain a good credit score, generally 700 and up. However, some programs allow minimum FICO scores as low as 620 or 660 for specific LTVs.
- Maximum DTI: The maximum Debt-to-Income (DTI) ratio allowed is generally capped at 50%.
- Loan Purposes: BSLs are available for Purchase, Rate-and-Term Refinance, and Cash-Out Refinance.
- Property Types: Eligible property types include Primary Residences, Second Homes, and Investment Properties.
- LTV/Down Payment: Maximum LTVs can reach 90% for purchase of a primary residence (requiring a minimum 10% down payment). Cash-out refinance LTVs are typically lower, such as a maximum of 75% for Primary Residence and 75% for Second Home/Investment properties with certain FICO scores.
FAQ's
Yes. Bank Statement Loans are considered higher risk since they lack traditional income verification, and therefore often require larger down payments, typically 10% to 20% or more, to offset the risk.
No, the BSL program is primarily for self-employed borrowers with an active business. Retirees or high-asset, low-income borrowers should typically use Asset Depletion Loans, which calculate imputed income directly from their liquid assets.
Ineligible deposits that must be excluded include tax refunds, transfers between other personal accounts (except business to personal), payroll from other sources, advances, and loan proceeds.
Unexplained large deposits or any single deposit exceeding 50% of the total qualifying income must be documented with a Letter of Explanation (LOE).
BSLs are ideal for individuals with fluctuating or irregular income streams. The evaluation focuses on assessing the average monthly deposits and requires the statements to show a stable and consistent income stream reflected clearly in the deposits.
Borrowers generally must demonstrate at least two years of self-employment history in the same business.
Lenders apply an expense ratio to the gross eligible deposits to determine the net qualifying income. A fixed expense ratio of 50% is standard for most business types.
No. Tax transcripts are explicitly NOT required on Bank Statement Loans. If tax returns or transcripts are provided in the loan file, the loan will be rendered ineligible for the Bank Statement Product.
Lenders verify income by reviewing 12 or 24 months of complete and consecutive bank statements from the borrower’s account(s).
The main problem solved is that self-employed borrowers often use legitimate tax deductions and write-offs that intentionally minimize their taxable income on federal returns. BSLs bypass these minimized tax figures.
527 Sycamore Valley Rd W, Danville, CA 94526
Toll Free Call : (866) 280-0020
For informational purposes only. No guarantee of accuracy is expressed or implied. Programs shown may not include all options or pricing structures. Rates, terms, programs and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions may apply. Equal Housing Opportunity.
Interactive calculators are self-help tools. Results received from this calculator are designed for comparative and illustrative purposes only, and accuracy is not guaranteed. Shining Star Funding is not responsible for any errors, omissions, or misrepresentations. This calculator does not have the ability to pre-qualify you for any loan program or promotion. Qualification for loan programs may require additional information such as credit scores and cash reserves which is not gathered in this calculator. Information such as interest rates and pricing are subject to change at any time and without notice. Additional fees such as HOA dues are not included in calculations. All information such as interest rates, taxes, insurance, PMI payments, etc. are estimates and should be used for comparison only. Shining Star Funding does not guarantee any of the information obtained by this calculator.
Privacy Policy | Accessibility Statement | Term of Use | NMLS Consumer Access
CMG Mortgage, Inc. dba Shining Star Funding, NMLS ID# 1820 (www.nmlsconsumeraccess.org, www.cmghomeloans.com), Equal Housing Opportunity. Licensed by the Department of Financial Protection and Innovation (DFPI) under the California Residential Mortgage Lending Act No. 4150025. To verify our complete list of state licenses, please visit www.cmgfi.com/corporate/licensing