Bank Statement Loans vs. Conventional Loans

Bank Statement Loans vs. Conventional Loans

You have many options when it comes to getting a loan to cover your financial needs. Each option caters to different financial situations and requirements. Two popular choices in the lending landscape are bank statement loans and conventional loans. Each of these has its unique features and benefits. In this article, you’ll understand the differences, and we’ll help you make an informed decision.


Understanding Bank Statement Loans

Bank statement loans are a specialized type of mortgage. They are designed for individuals who don’t have a steady income. Therefore, they wouldn’t meet the traditional verification criteria of conventional loans. These loans take into account your bank statements over a specific period, usually 12 to 24 months. Bank statement loans are beneficial if you’re a freelancer, self-employed, or a business owner with varying monthly income.

The key advantages of bank statement loans include:

    • Flexibility: Bank statement loans provide more flexibility in income verification, making it easier for self-employed individuals to qualify for financing.

    • Quick Approval: The application process for bank statement loans is often quicker than conventional loans, as the focus is on bank statements rather than extensive documentation.

    • Higher Loan Amounts: These loans might allow for higher loan amounts compared to conventional loans, as they consider a broader view of your financial situation.

    Exploring Conventional Loans

    Conventional loans are the most common loan for purchasing a house or refinancing.  These loans follow guidelines set by entities like Fannie Mae and Freddie Mac. The government sponsors these entities. Conventional loans require a stable income, a reputable credit score, and a down payment. They are best for individuals with a steady job that pays well and has strong credit.

    The benefits of conventional loans include:

      • Lower Interest Rates: Conventional loans often come with lower interest rates compared to some alternative lending options.

      • More comprehensive Property Options: Since conventional loans adhere to standardized guidelines, they can finance a wide range of property types.

      • Private Mortgage Insurance (PMI): While a down payment of less than 20% might require PMI, conventional loans offer the possibility of removing PMI once a certain equity threshold is reached.

      Making the Choice

      The decision of bank statement loans vs. conventional loans depends on your unique financial situation and goals. Here are some factors to consider:

        • Income Stability: A conventional loan might offer lower interest rates and better terms if you have a consistent income and meet the traditional lending criteria.

        • Income Variability: If your income fluctuates or you are self-employed, a bank statement loan might be more suitable, as it considers your banking history rather than just fixed income figures.

        • Timeline: Consider your timeline for securing the loan. A bank statement loan’s streamlined process might be appealing if you need financing quickly.

        • Long-Term Goals: Evaluate your long-term homeownership goals. If you plan to stay in the property for an extended period, a conventional loan’s lower interest rates could be advantageous.
        income stability for loans

        The Application Process

        Both bank statement loans and conventional loans have their unique application processes. Understanding what’s involved can help you smoothly navigate.


        Bank Statement Loan Application

        Applying for a bank statement loan involves several steps:

          1. Gather Documentation: Collect your bank statements for the specified period (usually 12 to 24 months), showcasing your income and financial transactions.
          2. Credit Check: While bank statement loans are often more lenient with income verification, a credit check is still conducted to assess your creditworthiness.
          3. Provide Proof of Business: If you’re self-employed or a business owner, you might need to provide additional documentation to validate your business and its income.
          4. Choose a Lender: Research and select a lender experienced in providing bank statement loans. Their expertise will be valuable throughout the process.
          5. Submit Application: Complete the lender’s application process, including providing necessary documentation and details about the property you intend to purchase or refinance.
          6. Underwriting: The lender reviews your application, bank statements, and credit history to determine your eligibility and loan terms.
          7. Approval and Closing: If approved, you’ll receive a loan offer outlining the terms. Once you accept, the closing process begins, involving legal documentation and the transfer of funds.

          Conventional Loan Application

          The process for applying for a conventional loan involves these steps:

            1. Check Eligibility: Review the eligibility criteria set by the lender, including credit score, income stability, and down payment requirements.
            2. Preapproval: Consider getting preapproved to understand the loan amount you qualify for. This can help in your property search.
            3. Gather Documentation: Collect necessary documents, including pay stubs, tax returns, and proof of assets, to support your income and financial stability.
            4. Choose a Lender: Research and choose a reputable lender offering conventional loans. Their expertise will guide you through the application process.
            5. Submit Application: Complete the lender’s application and provide the required documentation.
            6. Underwriting: The lender reviews your documents to determine the loan terms.
            7. Appraisal and Title Search: The lender conducts an appraisal of the property and a title search to confirm ownership.
            8. Loan Approval: Once the underwriting process is complete, the lender approves the loan and provides a Loan Estimate detailing the terms.
            9. Closing: Attend the closing meeting to sign the necessary documents and finalize the loan. This involves the transfer of funds and ownership.


            Pros and Cons Comparison

            Let’s take a closer look at the pros and cons of bank statement loans and conventional loans:

            pros and cons of loans

            Bank Statement Loans


              • Flexible income verification.

              • Quick approval process.

              • Potential for higher loan amounts.

              • Suited for self-employed and freelancers.


                • They might have higher interest rates.

                • Limited lender options compared to conventional loans.

                Conventional Loans


                  • Lower interest rates.

                  • A wider array of lender options.

                  • Possibility of lower down payments.

                  • Ideal for stable income earners.


                    • Stringent income and credit verification.

                    • Longer approval process.

                    • Not well-suited for those with fluctuating income.

                    To summarize, both bank statement loans and conventional loans have their advantages. But as you can see, they cater to individuals with different financial situations. Understand your income, credit history, and financial goals as it plays out in the world of loans. Knowing these will help you plan the best loan for your situation. We recommend that you consult with a mortgage specialist before making any choices. An extra set of eyes can help you see things you might not have before. Remember to choose a loan where you can make consistent and timely payments. We hope you can now make a more informed decision on bank statement loans vs. conventional loans.



                    Reference this related post on picking the right loan for you.


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