Most Common Non-QM Option for Self-Employed
Bank Statement Loan is the Most Common Non-QM Option for Self-Employed Borrowers | Identification of the Leading Non-QM Solution
The Bank Statement Loan is the Most Common Non-QM Option for Self-Employed Borrowers, offering the most popular alternative income documentation method in the Non-QM market. These loans are critical for borrowers in the self-employed, independent contractor, and small business owner segments whose financial circumstances do not align neatly with conventional lending criteria.
- Leading Volume: DSCR loans remain a leading segment in Non-QM, but DSCR loans accounted for approximately 28.7% of Non-QM originations by volume as of July 2025, which is second only to bank-statement loans.
- Purpose: Bank statement loans allow self-employed borrowers to verify income using their bank statements instead of traditional documentation like W-2s, pay stubs, or tax returns.
- Ineligibility with Tax Returns: Importantly, for many Bank Statement programs, the borrower must not provide tax returns or tax transcripts. If tax returns are provided, the loan will typically be ineligible for the Bank Statement Product and would have to be underwritten under Full Documentation guidelines.
Core Qualification Requirements
The Bank Statement program is designed for borrowers with an active U.S. based business that is generating stable revenue.
- Documentation Period: The borrower must typically provide 12 or 24 consecutive months of bank statements.
- Employment History: Borrowers must generally have been self-employed for at least two years in the same business. Less than two years (but not less than one year) is sometimes permitted if the borrower can document a minimum of two years of previous experience in the same line of work.
- Ownership: The borrower must have an ownership interest of 25% or greater in the business to be considered self-employed.
- Verification of Business: The existence and active status of the business must be verified through a third party, such as a CPA, regulatory agency, or licensing bureau, typically within 30 to 120 days prior to the note date.
Income Calculation Methods (The Alternative to Tax Returns)
Instead of relying on the low net income reported for tax purposes, we analyze deposits and apply an expense ratio to determine the actual qualifying income.
1. Calculating Income from Personal Bank Statements
When personal bank statements are used:
- The total eligible deposits are typically averaged over the 12 or 24-month period.
- Only transfers or deposits from the business account(s) are considered eligible deposits.
- Deposits deemed to derive from passive sources or sources other than the business (such as rents, SSI, joint account holder wage income, or IRS refunds) must be excluded from the analysis.
2. Calculating Income from Business Bank Statements
When business bank statements are used, we use one of three methods to account for expenses:
- Fixed Expense Ratio (Uniform Expense Factor): This is a common and straightforward method where a fixed 50% expense ratio is multiplied by the gross deposits to determine net income. This calculated income is then multiplied by the borrower’s ownership percentage. This ratio is used for most business types.
- Third-Party Prepared P&L: A Profit and Loss (P&L) statement prepared by an independent CPA, EA, or licensed tax preparer (PTIN) can be used. This P&L must cover the same period as the bank statements. The resulting net income is often multiplied by the borrower’s ownership percentage.
- CPA/Tax Preparer Expense Ratio Letter: A third-party tax professional can provide a signed statement indicating the business’s specific expense ratio, which can be as low as 20% for certain professions. The eligible deposits are multiplied by (100% minus the verified expense ratio) to calculate qualifying income.
Distinction from Other Non-Tax Return Options
While the Bank Statement Loan is the most common alternative documentation option, self-employed individuals and investors also use other Non-QM products that do not require tax returns:
- DSCR Loans: Designed solely for investment properties. These loans qualify the borrower based on the property’s cash flow (Debt Service Coverage Ratio) rather than personal income or DTI.
- 1099 Only Loans: A specialty loan for independent contractors who are compensated via 1099s. Qualification uses the 1099 gross receipts minus an applicable expense ratio, such as a 10% uniform expense factor.
- P&L Only Loans: Allows qualification using an unaudited P&L statement prepared by a third-party CPA/EA/CTEC. These are often restricted to businesses where the tax preparer has filed the borrower’s most recent tax returns.
FAQ's
DSCR (Debt Service Coverage Ratio) Loans are a leading Non-QM segment. These loans qualify the investor based on the property’s cash flow (rental income) rather than requiring any verification of the borrower’s personal income or employment status.
Deposits that exceed 50% of the average monthly deposits must be explained via a Letter of Explanation (LOE) to ensure they are consistent with the business profile and are not non-recurring income (like tax refunds or loan proceeds).
These are considered co-mingled accounts. The lender will treat them as business accounts for income purposes, which means they are subject to the required expense ratio deduction.
If the borrower provides tax returns and/or transcripts, the loan will be rendered ineligible for the Bank Statement Product and must be underwritten based on Full Documentation guidelines.
Yes. A signed statement from a third-party tax preparer (CPA, EA, or PTIN) can be provided, indicating the specific expense ratio of the business. The minimum expense factor allowed can be as low as 20% for certain service-related businesses.
When using business bank statements, lenders commonly apply a fixed 50% expense ratio to the eligible gross deposits to determine the net income that can be used for qualification.
A borrower is defined as self-employed and eligible for the Bank Statement program if they have an ownership interest of 25% or greater in the business.
Borrowers usually need to provide 12 or 24 consecutive months of bank statements.
Self-employed borrowers often take significant tax deductions and write-offs, which results in their tax returns not accurately reflecting their robust monthly cash flow or overall ability to repay the mortgage.
The most popular alternative documentation method is the Bank Statement Loan. This loan allows self-employed borrowers to verify income through bank statements instead of traditional tax returns or W-2s.
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