If you own a business, your tax return is designed to show as little income as the law allows. That is good for your tax bill and bad for a mortgage application, because most loans qualify you on that taxable income. A bank statement loan takes a different approach: it looks at the money that actually flows through your accounts. This guide explains how bank statement loans work, what lenders ask for and when a conventional loan is still the better choice for self employed buyers in Colorado.
Quick answer
A bank statement loan qualifies you on the average deposits in 12 or 24 months of personal or business bank statements instead of your tax returns. For business accounts, lenders apply an expense factor to estimate your income after costs. These are usually non qualified mortgages, so expect a larger down payment, stronger reserves and a higher rate than a conventional loan. They make the most sense when write offs make your tax returns understate what you really earn. If your returns already support the payment, a conventional loan is usually cheaper.
How does a bank statement loan work?
Every mortgage lender must make a reasonable, good faith determination that you can repay the loan, and it must verify your income with reasonably reliable third party records. Under the federal Ability to Repay rule, records from a financial institution are one of the listed examples, which is why bank statements can stand in for tax returns.
Because these loans do not follow Fannie Mae or Freddie Mac documentation rules, most are made as non qualified mortgages, often called non QM loans. Each lender sets its own guidelines for credit, down payment, reserves and how deposits are counted, so terms vary more than they do for conventional loans.
How do lenders calculate income from bank statements?
Lenders total the eligible deposits over the statement period and divide by the number of months. What counts as eligible, and how much is kept, depends on the type of account.
| Statement type | How income is figured | Example |
|---|---|---|
| Personal account | Average eligible deposits, usually counted in full because business costs are already paid | $14,000 average monthly deposits = $14,000 qualifying income |
| Business account | Average eligible deposits minus an expense factor, often a standard 50% unless a CPA, tax preparer or profit and loss statement supports a lower one | $30,000 average monthly deposits less 50% = $15,000 qualifying income |
Transfers between your own accounts, loan proceeds, refunds and other one time deposits are generally excluded. Large deposits that do not match your normal business pattern will need an explanation and documentation.
Tip: Using 24 months instead of 12 can smooth out seasonal income, which matters for Colorado businesses tied to ski season, summer tourism or construction. Using 12 months can help if your business has grown quickly.
What do you typically need to qualify for a bank statement loan?
Guidelines differ by lender and change often, so treat these as typical ranges rather than fixed rules:
- Self employment history: commonly two years in the same business or field, with some lenders accepting less.
- Statements: 12 or 24 consecutive months of complete personal or business statements.
- Business verification: a business license, CPA or tax preparer letter, or similar proof that the business exists and you own it.
- Credit: many programs start around 620 to 660, with better pricing at higher scores.
- Down payment: often 10% to 20% or more, depending on credit, loan size and property type.
- Reserves: several months of payments in the bank after closing is common, and more for larger loans.
Expect the rate to be higher than a conventional loan for the same borrower. Many borrowers use a bank statement loan to buy now, then refinance into a conventional loan once two years of tax returns show enough income.
Self employed and planning to buy?
Josh can compare a bank statement loan with a conventional approval using your actual statements and returns.
When is a conventional loan better for a self employed borrower?
If your tax returns support the income you need, a conventional loan usually costs less. Fannie Mae’s rules for self employed borrowers include:
- History: generally two years of self employment. Between 12 and 24 months can work if your latest returns show a full year from the current business and you have prior income at the same or higher level in the same field.
- One year of returns: lenders may accept just the most recent year of personal and business returns when the business has existed for at least five years, you have owned at least 25% of it for five years in a row and the returns support your application.
- Income analysis: the lender works from your returns, adding back items such as depreciation, so your qualifying income can be higher than your taxable income.
Freddie Mac’s automated self employed income tools also rely on tax returns or IRS transcripts, not bank statements. The practical test is simple: ask your loan officer to calculate your conventional qualifying income from your returns first, then compare it with a bank statement calculation.
What other loan options do self employed buyers have?
- 1099 income mortgages: for independent contractors paid on 1099s, some lenders qualify you on the 1099 totals less an expense factor.
- Profit and loss statement loans: some programs use a CPA or tax preparer prepared profit and loss statement, sometimes with fewer bank statements.
- DSCR loans: for rental property purchases, qualification is based on the property’s rent rather than your personal income.
- Asset based options: buyers with substantial savings or investments may qualify on those assets instead of income.
How should you prepare your bank statements for a mortgage?
- Separate business and personal money. Run business income through one account and pay yourself on a regular schedule.
- Avoid unexplained deposits. Keep records for anything unusual, such as a large client payment or the sale of equipment.
- Keep overdrafts off your statements. Repeated overdrafts or returned items raise questions in underwriting.
- Gather 12 and 24 months. Having both lets your loan officer run the calculation each way and use the stronger result.
- Get your CPA involved early. A letter confirming your ownership and a realistic expense ratio can raise your qualifying income.
- Check your credit. Pay down revolving balances before you apply to improve both approval and pricing.
Frequently asked questions
How many months of bank statements do you need for a mortgage?
Most bank statement programs use either 12 or 24 consecutive months of personal or business statements. Twenty four months can smooth seasonal income, while 12 months can help a growing business show its current earnings.
How do lenders calculate income from business bank statements?
They average your eligible business deposits and apply an expense factor, often a standard 50%, to estimate your income after business costs. A CPA letter or profit and loss statement can support a lower expense factor.
Are bank statement loans legal and regulated?
Yes. Lenders must still confirm your ability to repay under federal rules, and bank statements are an accepted type of third party income record. Most bank statement loans are simply made outside Fannie Mae and Freddie Mac guidelines as non qualified mortgages.
Can I refinance out of a bank statement loan later?
Often, yes. Many borrowers refinance into a conventional loan once their tax returns show enough income. Check your note for any prepayment penalty before you plan the timing.
Is a bank statement loan better than a conventional loan?
Only when your tax returns do not show enough income to qualify. When they do, a conventional loan usually has a lower rate, a smaller down payment and fewer restrictions.
Josh Lemos
Mortgage Broker, Lemos Group, powered by ARBOR Financial Group. Helping first time buyers, move up buyers and self employed borrowers, with a focus on the Greater Denver area and Vail.
NMLS #278295
Licensed in CA, CO, FL and OR
Self employed in Colorado?
Find out what your statements can qualify you for.
Josh Lemos can run your income both ways, from your bank statements and from your tax returns, and show which loan gives you the better rate and payment.
Sources and official resources
Information checked September 27, 2026. Rates, loan limits, program rules and assistance funding change, so confirm current terms before you rely on them.
This article is for general education only and is not a loan offer, commitment to lend, or tax or legal advice. Rates, terms, fees and programs vary by lender and are subject to change without notice. All loans are subject to credit approval, underwriting guidelines and property eligibility. Examples are illustrations, not quotes. Josh Lemos, NMLS #278295. Lemos Group is powered by ARBOR Financial Group. ARBOR Financial Group is a DBA of The Turnkey Foundation Inc., NMLS #236669 (NMLS Consumer Access). Equal Housing Opportunity.
