Comparison · Self-employed
Bank statement loan vs. tax returns: which shows more income?
Short answer
For many self-employed borrowers, bank statements show more qualifying income than tax returns, because write-offs lower the income on your return but not your deposits. The tradeoff: bank statement loans fall outside standard conventional guidelines, so pricing and terms often differ.
Why tax returns can undercount your income
A conventional loan generally qualifies you on the net income from your tax returns, after business expenses. Every write-off that lowers your tax bill also lowers the income a lender can count. That's good at tax time and a problem when you apply for a mortgage.
How a bank statement loan calculates income
- 12 or 24 months of personal or business bank statements.
- Deposits are averaged after removing transfers between your own accounts, loan proceeds and refunds.
- Business accounts usually get an expense factor taken off, either a set percentage or one based on a CPA-prepared profit and loss statement.
- Federal ability-to-repay rules allow lenders to verify income with records from financial institutions, not just tax returns.
Side by side
| Conventional (tax returns) | Bank statement loan | |
|---|---|---|
| Income source | Net income on your tax returns | Average deposits on your statements |
| Write-offs | Reduce qualifying income | Generally don't, beyond the expense factor |
| Documents | Tax returns, often two years | 12 or 24 months of statements |
| Guidelines | Fannie Mae / Freddie Mac | Lender-specific (non-QM) |
| Pricing and terms | Compare both | Often different; I quote both side by side |
Example with made-up numbers
Say your business deposits average $20,000 a month and the lender applies a 50% expense factor. Qualifying income would be $10,000 a month. If your tax return shows $4,000 a month after write-offs, the bank statement method shows more than twice the income. These numbers are for illustration only. Your expense factor depends on the lender and your business.
When tax returns still win
- Your returns already show strong income
- You want standard conventional terms and no prepayment penalty
- Your deposits are irregular or mixed with personal spending
Get your statements ready with my free bank statement loan prep guide.
Quick answers
Do I need two years of self-employment for a bank statement loan?
Many lenders look for two years, though some allow less. It depends on the lender.
Can I use personal and business statements?
Many lenders accept either. Business statements usually get an expense factor; personal statements usually need to show the deposits come from your business.
Is a bank statement loan a QM loan?
Usually not. Most bank statement loans are non-QM, meaning they fall outside the qualified mortgage standards lenders use for conventional loans.
Sources
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I'll look at a few months of deposits with you and show you both ways side by side.
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About Jayson Cain
I'm a mortgage loan originator in Los Angeles and a real estate investor who finances my own rental. I help investors and self-employed borrowers understand which programs may fit.