Bank Statement Loans vs. Traditional Mortgage: A California Borrower Guide

Bank statement loans have become more popular over the past few years, partly due to an increase in the number of self-employed and “gig economy” workers.

We’ve written about these types of loans in the past, and how they can benefit self-employed borrowers in particular. But there are other groups that could benefit from using bank statement loans as well.

Today, we will explain the key differences between a bank statement loan and a traditional mortgage loan. By understanding these differences, you’ll have an easier time deciding which option might be right for you.

At a glance: Bank statement loans and traditional mortgages differ mainly in their approach to income verification. Traditional mortgages require a lot of documentation like pay stubs, tax returns, and W-2 forms. In contrast, bank statement loans cater to individuals with non-traditional income sources, like self-employed individuals, by using bank statements as proof of income.

Traditional Mortgages: Overview and Features

A traditional or “conventional” mortgage is a home loan that is not insured or guaranteed by the government. This means the lender (or investor) bears all of the risk associated with the loan, unless it is sold into the secondary mortgage market. Because of this, borrowers must meet stricter eligibility requirements than those used for government-backed loans.

Traditional conventional loans are the most common type of mortgage product in the United States, accounting for about 70% of all new mortgages. They are available through a variety of lenders, including banks, credit unions, and mortgage brokers.

To qualify for a conventional mortgage, borrowers must typically have a credit score of at least 600, a debt-to-income ratio of no more than 50%, and a down payment of at least 3%. But these requirements are not set in stone. They can vary from one lender to the next.

Bank Statement Loans: Overview and Features

A bank statement home loan is a unique type of mortgage product that allows borrowers to qualify for financing based on their bank statements — instead of tax returns. This can be a helpful option for self-employed borrowers, or those who have other income sources not reflected in their tax returns.

To qualify for a bank statement home loan, borrowers typically need to provide 12 to 24 months of bank statements. The lender will then review those statements to determine the borrower’s income and expenses. The bank statements are also used to calculate the maximum loan amount.

As you might have guessed, bank statement home loans in California typically have higher interest rates than traditional mortgage products. That’s because the lender takes on more risk when they make a loan that’s primarily based on bank statements.

But despite the higher rate, bank statement loans can be a good option for California borrowers who are unable to qualify for a traditional mortgage due to employment or income reasons.

Eligibility and Qualification Differences

Traditional mortgages generally require a steady income, strong credit score, and a specific debt-to-income ratio. Lenders review a wide variety of documents to assess the borrower’s creditworthiness and ability to repay the loan.

Bank statement loans, on the other hand, focus on the cash flow represented by bank statements, allowing for more flexible qualification criteria. Self-employed individuals or those with variable income may find it easier to qualify for a bank statement loan.

Factors to Consider When Choosing

When deciding between a traditional mortgage or bank statement loan in California, borrowers should consider their unique financial situation, income stability, and long-term goals.

Here are some key factors to consider before choosing a product:

• Income Stability: Traditional mortgages favor borrowers with stable income streams, while bank statement loans accommodate individuals with non-traditional or variable income sources.
• Documentation: Bank statement loans simplify the application process with streamlined documentation, while traditional mortgages typically require more extensive income verification.
• Down Payments: Traditional / conventional mortgage loans often allow borrowers to make a down payment as low as 3% of the home value. Bank statement loans, on the other hand, tend to require larger down payments due to the higher level of risk involved.

Related Articles on This Subject

We have published hundreds of articles, guides and tutorials over the years, most of them geared toward home buyers and homeowners in California. Here are some articles related to this subject:

How Bank Statement Loans Work
As the title suggests, this article digs deeper into the “nuts and bolts” of these unique loan products, including the application process and basic documentation requirements.

Mortgages for Self-Employed Borrowers
Bank statement loans aren’t the “only game in town” for self-employed home buyers in California. Depending on the situation, conventional, FHA and stated-income home loans can also provide a viable path to homeownership.

Bank Statement Jumbo Loans
This product-in-the-spotlight article explains how borrowers can qualify for a jumbo loan in California by using their bank statements as the primary documentation.

If you’d like information on a subject that’s not mentioned above, just use the search tool at the top of our website. Our research library contains hundreds of articles and covers many mortgage-related topics!

Ready to Explore Your Financing Options?

Understanding the differences between traditional mortgages and bank statement loans is the first step to choosing the right product. So we encourage you to continue your research into these and other home-financing options.

If you’re planning to buy a home in California and have questions about your loan options, please feel free to contact our staff. Bridgepoint Funding serves borrowers all across California and offers a wide variety of loan options.

We can review your current financial situation and your long-term goals to help you choose the right type of mortgage loan.