Sometimes you just can’t qualify for a loan the standard way. Self-employed, seasonal, and commissioned employees often have this trouble. They don’t have a steady paycheck and they take numerous deductions on their taxes. Both of these issues combine for a very risky loan, causing lenders to turn them down. Luckily, there is the option of the bank statement loan. Using 12 or 24 months of your bank statements, you may qualify for a loan.
Keep reading to learn how it works.
12 or 24 Months of Personal Bank Statements
The most common and possibly the easiest program is the Personal Bank Statement program. With this program, you provide the last 12 or 24 months of your personal bank statements. You must provide all pages of each month’s statement.
The lender will use 100% of your deposits averaged over the last 12 or 24 months, depending on which program you chose. This gives you the chance to qualify for a loan based on the income you bring in, rather than what you claim on your taxes. The lender takes an average in order to account for the highs and lows your income likely experiences throughout the year.
If you have $20,000 in deposits over the last 12 months, you would have $20,000/12 = $1,667 monthly income
If you have $45,000 in deposits over the last 24 months, you would have $45,000/24 = $1,875 monthly income
In order to use this program, you would also have to provide a year-to-date Profit & Loss statement for your business or commission income in order for the lender to compare your income to your bank statements. The P&L must be created by a third party, such as your CPA. The lender will compare the P&L to the bank statements as well as to the standards for the industry that your business is in to ensure everything is in line with what the industry states.
12 or 24 Months of Business Bank Statements
Now, if you don’t have regular deposits in your personal bank accounts, you may want to use your business bank accounts for qualifying purposes. While you can do this, the lender will likely only use 50% of your deposits. In other words, they will total up your deposits over the 12 or 24 months and then divide it by 2.
The lender will then take that total and average it over the last 12 or 24 months, depending on the number of bank statements you provided.
If you have $50,000 in deposits over the last 12 months, you would have $50,000/2 = $25,000
$25,000/12 = $2,083 monthly income
If you have $60,000 in deposits over the last 24 months, you would have $60,000/2 = $30,000
$30,000/24 = $1,250 monthly income
Again, you will need a P&L created by a third party to verify the income you have in your bank statement comes from your business and not another source.
Outside of your income, the lender will need to verify your credit score and debt ratio. Because each lender can make their own requirements, the guidelines vary across the board.
On average, though, lenders require at least a 580 credit score. They also don’t allow debt ratios that go much beyond 43%. This allows the loans to fall within the Ability-to-Repay Rules, giving the lender a lower chance of you defaulting on the loan.
It also helps if you have steady employment. Even if you are self-employed, you should wait until you run the business for at least 2 years before you apply. This way the lender can see a pattern of your income over the last 24 months. They also have a greater reassurance that you will succeed in business. If you just started out, it’s a much higher risk for the lender, which could result in a higher interest rate and/or fees.
The 12 and 24-month bank statement loans are a great way for the self-employed or seasonal employees to secure loan financing. You’ll want to shop around and find the most affordable loan for your situation, though. Because they are not regulated by the government, you’ll likely see requirements and even interest rates all over the board. Find the loan that is the most affordable and has the best terms to set yourself up for success.