Bank Statement Loans for Real Estate Investors
Bank Statement Loans for Real Estate Investors Program Overview and Investor Applicability
Bank Statement Loans for Real Estate Investors (BSLs) are defined as Alternative Documentation (“Alt Doc”) loans designed for self-employed professionals, small business owners, contractors, and freelancers whose financial situations do not align neatly with conventional lending criteria.
A. Purpose for the Investor
Self-employed borrowers often utilize legitimate tax deductions and business write-offs that significantly minimize their taxable income, making it difficult to qualify using traditional tax returns. BSLs address this gap by allowing the investor to use their cash flow to demonstrate income, enabling them to secure financing for residential investment properties.
B. Distinction from DSCR Loans
It is crucial to understand the difference between BSLs and DSCR (Debt Service Coverage Ratio) loans for investors:
- DSCR Loans: Tailored for investment properties and qualify based on the property’s cash flow only, with no personal income or employment verification required.
- Bank Statement Loans: Used to qualify the borrower’s personal income derived from their active self-employment business.
C. Ineligible Borrower Profiles
The Bank Statement program is strictly designed for borrowers with an active, U.S. based business that generates stable revenue. Borrowers are ineligible if their income is derived only from passive or portfolio sources, such as:
- Managing their own rental properties.
- Distributions from a limited partnership.
- Asset speculation, day trading, or property flipping activities.
Income Calculation and Documentation Requirements
The foundation of the Bank Statement Loan lies in the analysis of 12 or 24 months of business or personal cash flow in lieu of federal tax documentation.
A. Documentation Period
Lenders require 12 or 24 months of complete and consecutive bank statements from the same account. These statements must typically be dated within 60 to 90 days of the note date. Tax transcripts are not required on Bank Statement Loans.
B. Income Calculation Methodology
The method used to determine qualifying income varies based on the account type:
- Business Bank Statements: When using business statements, an expense ratio must be applied to the gross deposits to determine the net income.
- Fixed Expense Ratio: A fixed expense ratio of 50% is standard for most business types. The net income is calculated by multiplying eligible deposits by 50% and then by the borrower’s ownership percentage. Any loan with an LTV greater than 85% is required to use the 50% expense factor.
- Third-Party Prepared P&L: Net income may be derived from a Profit & Loss (P&L) statement prepared by an independent CPA, Enrolled Agent (EA), or licensed tax preparer.
- Personal Bank Statements: Only deposits received directly from the borrower’s business account(s) are considered eligible. Transfers between personal accounts are excluded. If a personal account is jointly owned by a non-borrower, all deposits not identifiable as business income must be excluded.
C. Business History and Ownership
- Self-Employment History: Borrowers generally must have been self-employed in the same business for a minimum of two years.
- Ownership: The borrower must maintain an ownership interest of 25% or greater to utilize business bank statements. Some programs allow 20% ownership if using personal bank statements with supporting business statements.
- Verification: Verification that the borrower has been self-employed and their business is active is required, often documented via a letter from a CPA or regulatory agency.
Investment Property Loan Parameters
Bank Statement Loans can be used to finance Investment Properties. The qualification standards reflect the inherently higher risk associated with non-traditional income verification for non-owner-occupied properties.
| Criterion | Standard Requirements (Alt Doc – Investment) |
| Loan Purpose | Purchase, Rate-and-Term Refinance, and Cash-Out Refinance are generally permitted. |
| Maximum DTI | The maximum Debt-to-Income (DTI) ratio allowed is generally 50%. |
| Minimum FICO | A good credit score is required, often 700 or higher. Some programs allow FICO as low as 620 for certain LTVs. |
| Max LTV (Purchase/R&T) | For borrowers with FICO 680+, the maximum LTV for Purchase or Rate/Term Refinance on an investment property is typically 80%. LTVs may be reduced by 5% in certain Alt Doc methods. |
| Max LTV (Cash-Out) | For Cash-Out Refinance on an investment property, the maximum LTV is typically capped at 75% for FICO 680+ borrowers. River DSCR caps Cash-Out LTVs for investment properties based on FICO, sometimes as low as 65%. |
| Reserves | Alternative Documentation loans (which include Bank Statement loans) generally require 6 months of reserves. |
| Rental Income (Supplemental) | Rental income from a non-subject property can be used to supplement the bank statement income. The income is typically calculated as 75% of the current lease income less documented PITIA. |
| Tax Documentation | Tax transcripts are not required on Bank Statement loans. If tax returns or transcripts are provided, the loan may be rendered ineligible for the Bank Statement product. |
FAQ's
While lenders prefer a good credit score (700 and up), some Alt Doc programs allow minimum FICO scores as low as 620 or 660 for investment properties, typically with corresponding LTV limits.
A DSCR loan focuses strictly on the investment property’s cash flow and does not verify the borrower’s personal income or employment. A BSL focuses on the self-employed borrower’s active business income.
No, gift funds are generally not allowed to be used for the down payment or closing costs on investment property transactions.
Yes, BSLs are eligible for Cash-Out Refinance transactions on investment properties. However, the LTV maximum is generally lower, often capped at 75% (for FICO 660+) or lower depending on the loan amount.
For purchase and rate/term refinance on investment properties, the maximum LTV often reaches 80% (requiring a minimum 20% down payment) for borrowers with FICO 660 or higher.
Yes, rental income from the subject or non-subject properties can be used to supplement the bank statement income. Rental income is typically calculated as 75% of the gross rent minus the property’s PITIA (Principal, Interest, Taxes, Insurance, HOA).
The lender averages eligible deposits over 12 or 24 months of bank statements. If using business statements, a fixed expense ratio of 50% is often applied to the gross deposits before calculating the income.
Borrowers who only receive income from passive or portfolio sources are ineligible for the BSL program. This includes income derived from managing their own rental properties, property flipping, or day trading.
The BSL is designed to verify the borrower’s self-employed income based on cash flow from an active U.S. based business. This is necessary because many investors use tax write-offs that result in low taxable income.
Yes, BSLs, which fall under the Alternate Income Documentation (Alt Doc) category, are eligible for financing Investment Properties.
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