Bank Statement HELOC Loan: Everything You Should Know

A bank statement HELOC loan is a financing option designed for homeowners who may not qualify for a traditional home equity line of credit (HELOC). This is usually because they are self-employed, have variable income, or rely on non-traditional income sources. This type of HELOC uses your bank statements to verify your income instead of traditional documentation such as pay stubs and tax returns.

At RenoFi, we want to help you understand all of your borrowing options. In this guide, we’ll cover everything you need to know about bank statement HELOCs. We explain how they work and who they’re best suited for, as well as the application process and tips on managing your loan effectively.

How a Bank Statement HELOC Works

Like traditional HELOCs, bank statement HELOCs let homeowners take out loans backed by the equity in their homes. The major difference is that this type of loan uses your bank statement to verify your income instead of tax returns, W-2 forms, or other employment verification forms used in a traditional HELOC.

How Lenders Verify and Calculate Bank Statement Loans

To verify your income, you’ll need to provide your bank statements for 12 to 24 months, depending on the lender’s requirements. When calculating how much you qualify for, lenders typically analyze your bank statements to determine your average monthly income. They may not require 12 or 24 consecutive months of business-related deposits if your income is seasonal, as they understand that your income patterns can fluctuate over time.

To figure out your average monthly income, lenders usually look at the irregularities in your earnings. They might average out your deposits over the 12 to 24-month period, to get a clearer picture of your monthly income. This average helps them decide how much you can qualify for in a HELOC.

Besides checking your income, lenders also look at your credit score, debt-to-income ratio, and the value of your home compared to the loan amount. These factors help them see if you can repay the loan and if the loan amount makes sense based on your finances.

Who Can Benefit From a Bank Statement HELOC?

A Non-QM (Non-Qualified Mortgage) loan, such as bank statement HELOC, might be a great option for you if you don’t have a traditional income source. If you take tax deductions that make your income look lower on paper, a bank statement HELOC lets you use your bank deposits as proof of income. This way, you can show your true financial strength and get the loan you need. 

Here are some of the ideal candidates who can benefit from this type of loan:

• Self-Employed Individuals: This loan may suit you if you run your own business and have fluctuating income without regular pay stubs.
• Freelancers and Gig Workers: If you work on a project-by-project basis or have multiple sources of income, a bank statement HELOC can help you prove your earnings.
• Business Owners: As an entrepreneur who reinvests profits into your business, your taxable income will likely be on the lower side, but your bank statements can paint a clearer picture of your finances.
• Real Estate Investors: If you earn from rental properties, your income might be irregular, but consistent bank deposits can help you qualify.
• Contractors and Consultants: You may have irregular income patterns if you work on contracts or consult on projects, but your bank statements can demonstrate your ability to repay a HELOC.

How to Get Approved

To get approved for a bank statement HELOC, you’ll need to meet specific requirements, including the following:

Credit Score

A good credit score is important for approval. Typically, lenders require a credit score of 680 or higher, but 720 or above will likely qualify you for better interest rates and terms. If your credit score is lower, you may still qualify but expect higher interest rates and stricter terms.

Sufficient Equity

You’ll need to have a significant amount of equity in your home. Lenders usually require a loan-to-value (LTV) ratio of around 80% to 85%, meaning you should have at least 15% to 20% equity in your home to qualify.

Bank Statements

As a borrower who can’t provide traditional income documentation, lenders will use your bank statements from the past 12 to 24 months to verify your income and decide if you qualify for a HELOC. They typically look for a history of consistent income and a stable financial situation.

Debt-to-Income (DTI)Ratio

Apart from a stable income, lenders will also review your expenses to make sure your financial habits support your ability to repay the HELOC. They look at your DTI ratio to compare your monthly debt payments to your gross monthly income. Lenders usually prefer a DTI ratio of 43% or lower.

Required Documentation

To help lenders determine your financial stability and whether you can repay the loan, you will need to provide additional documents besides your bank statements. Depending on your lender, you might be asked to provide:

• Proof of Identity: A government-issued photo ID, such as a driver’s license or passport.
• Social Security Number Verification: This can be a Social Security card or a document with your SSN listed.
• Homeownership Documents: Proof of your most recent mortgage statement, homeowners insurance policy, and property taxes are standard requirements.
• Property Appraisal: An appraisal by a licensed professional might be required to determine your home’s value and calculate your LTV.
• Proof of Business Ownership (for Self-Employed Borrowers): This could include business licenses, permits, or formation documents.
• Profit and Loss Statements: If you’re self-employed, a profit and loss statement can help verify your income over a specific period.

How to Apply for a Bank Statement HELOC Loan

Step 1: Find the Right Lender

Not all lenders offer bank statement HELOCs. It’s usually a good idea to work with a licensed mortgage broker, like RenoFi, to help you find and connect with experienced lenders. This will save you time and hassle in searching for credible lenders that will best fit your financial situation.

Step 2: Prepare Your Documents

Gather 12-24 months of your personal bank statements to show your income stability and cash flow. Organize any extra documents your lender may ask for, such as profit and loss statements. If you have one, a letter from your accountant can also give more context about your finances.

Step 3: Submit Your Application

Complete and submit your lender’s pre-approval application. Be ready to discuss any irregularities in your bank statements. Remember, being open about your financial history is important. It’s normal for lenders to carefully review everything and ask for more documents to make sure you can pay back the loan.

Step 4: Closing and Funding

After approval, you’ll move on to the closing process to finalize your HELOC. Lenders will do a home appraisal to determine your property’s value and available equity. Once closing is complete, you’ll have access to your approved credit limit to use as needed during the draw period.

Interest Rates and Fees

If you qualify and get approved, you’ll have access to a revolving credit line, much like a credit card. You don’t need to pay interest on the loan during the draw period. However, you’ll have to pay back the borrowed amount plus interest during the repayment period.

Here’s what to keep in mind regarding the interest and fees when considering this type of loan:

Typical Interest Rate Ranges

Interest rates for HELOCs can vary widely based on your credit score, loan-to-value ratio, and current market conditions. Typically, you can expect rates to range from around 8.64% to 10.81%.

Variable Rates

HELOCs usually come with variable interest rates, which means the rate can change over time based on market conditions. This means the amount of interest you pay on your outstanding balance can go up or down from month to month.

Fixed Interest

Some lenders offer fixed-rate options for HELOCs. With a fixed rate, your interest rate and monthly payments stay the same throughout the loan term, making it easier to budget. However, fixed rates usually start higher than variable rates.

Potential Fees

Besides interest rates, there are various fees and closing costs to be aware of when taking out a HELOC. Some of the fees include:

• Closing Costs: HELOC closing costs can range from 2% to 5% of the total loan cost, depending on the lender and loan product.
• Appraisal Fee: This fee pays a real estate expert to assess the current market value of your home, which is used to calculate how much you can borrow from your equity.
• Fixed Rate Conversion Fee: Some HELOCs allow you to convert your variable rate to a fixed rate, but there may be additional fees for doing this.

Pros and Cons of Bank Statement HELOCs

Pros

1. Flexible Income Verification: Bank statement HELOCs let you qualify without needing traditional documentation, such as tax returns or W-2 forms. This is great if you’re self-employed or have unconventional income sources.
2. Potential for Higher Limits: Bank statement HELOCs can offer higher credit limits, which gives you more options for your finances.
3. Flexible DTI Requirements: Bank statement HELOCs usually have more relaxed DTI ratio requirements compared to traditional HELOCs. Some lenders can even approve DTI ratios up to 50%.
4. Use for Investments and Second Homes: You can use a bank statement HELOC to finance investment properties or second homes. This gives you more options for your investments.

Cons

1. Possibly Higher Interest Rates: Sometimes, bank statement HELOCs come with higher interest rates than traditional mortgages, meaning you’ll likely pay more each month.
2. Business History Requirement: Some lenders may ask for a strong business history to qualify. This could be tough if you’re just starting out in self-employment or business.
3. Limited Availability: Not all lenders offer bank statement HELOCs, so finding the right lender might take some research.

Alternatives to Bank Statement HELOC Loans

If you struggle to qualify for traditional HELOCs, bank statement loans are one way to borrow money. But there are other mortgage options that don’t need years of financial records and may even be cheaper. These alternatives include:

RenoFi Loans

Unlike conventional loans, RenoFi offers a new solution by letting you borrow against the future value of your property post-renovation, rather than borrowing against its current value. 

For example, imagine your home is currently valued at $500,000 and your outstanding mortgage balance is $400,000. You are planning a renovation and expect that the after renovation value of your home would be approximately $640,000. Your current loan-to-value ratio (LTV) is at 80%, which means that you effectively can’t borrow anything to fund your renovation. A RenoFi loan, however, would allow you to go as high as 150% LTV or 90% LTV using the after renovation value.

So in this example, while using a standard home equity loan results in your borrowing power being $0, a RenoFi loan allows you to borrow up to $176,000 thanks to the after renovation value of your home!

If you are considering a home renovation, RenoFi is by far the smartest way to finance your project. Learn more and explore your borrowing options here.

Conventional Loans

These are the standard loans you can get from most banks and lenders. They usually have better rates and terms than bank statement loans, but you need to show pay stubs and other income documents.

DSCR Loans

You might be able to take out a debt service coverage ratio (DSCR) loan, especially if you’re a real estate investor. The lender looks at the cash flow from your rental properties to see if you qualify.

FHA Loans

If you’re a first-time home buyer, an FHA loan might be an excellent choice. The requirements are more relaxed, so it’s easier to qualify.

VA Loans

If you or your spouse served in the military, you can get these loans with no money down. The terms are really good too.

Interest-Only Loans

With these types of loans, you only pay interest at first, so the costs are lower initially. But you’re not building any equity, so it might not be great long-term.

Tips for Using Your HELOC Wisely

Here are some smart ways to use your HELOC funds:

• Boost Your Home’s Value. Renovate to improve your living space and increase your home’s market value. You can remodel your kitchen or bathroom, or finish the basement.
• Pay Down Debt. Use your HELOC to consolidate high-interest debt like credit cards or personal loans. This can free up cash each month so you can manage your debt more easily.
• Invest for the Future. Use your HELOC for smart investments. You could make your home more energy-efficient to reduce your utility bills or add a rental unit to boost the resale value.

Finding the Right Lender for Your Bank Statement HELOC

While not super common, a bank statement HELOC can be a good choice if you have trouble qualifying for a traditional loan because of self-employment or variable income. Since income verification uses bank statements, lenders might see this as a bit riskier. But the good news is that it lets lenders help more people who show financial stability through their bank activity.

RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the After Renovation Value of your home. This allows you to borrow on average 11x more, get a low monthly payment, and keep your low rate on your first mortgage. 

If you need help finding the right lender, connect with RenoFi. As a licensed mortgage broker, we can connect people with non-traditional income sources with experienced lenders who specialize in understanding the unique needs of borrowers in your situation.