Can I Show Proof of Income With Bank Statements When Buying a House?

Impact of Alternative Documentation

If you use bank statements rather than tax returns to prove income, the loan is considered Alt-A. This means Fannie Mae and Freddie Mac lenders will not approve it. You still might be able to get financing with other lenders, but the cost and interest rate will be substantially higher than with a conventional loan. For example, if the going rate on a conventional loan is 5 percent and $5,000 in costs, a non-conventional loan might be at 7 percent with costs of $8,000. The down payment requirements also will be steeper. Rather than being able to put 10 percent down, you might be required to put 20 percent down.

If you find a lender that offers a loan with alternative documentation, you’ll need at least two years' worth of complete bank statements that show consistent income deposits. This can’t include transfers from one account to another, and you must be able to prove that the deposits are from income sources such as customer sales in your business. You must also have all pages of the bank statement, not just the pages that reflect deposits. If the deposits are from a business source, you must provide a copy of your business license or other evidence that you have an established business.

Even with alternative income documentation, you’ll need to qualify based on the lender's specific debt-to-income-ratio guidelines. This is the ratio of your fixed monthly debts, such as your proposed new house payments, car payments and credit card payments, with your monthly income. The standard debt-to-income-ratio should be around 43 percent, which means your monthly debt payments can’t exceed this percent of your monthly income. For example, if your monthly income is $10,000, your monthly debt payments shouldn’t exceed $4,300.

If you can’t find a good loan based on alternative documentation loans, consider using standard documentation, which includes your individual tax returns for two years, including the Schedule C. The lender will verify this income with the Internal Revenue Service using Form 4506, which you’ll have to sign prior to getting the loan. If this income isn’t sufficient, consider securing a co-signer for more income. On conventional loans, the co-signer must plan on living in the home; however, with Federal Housing Administration loans, the co-signer doesn’t have to be an owner-occupant.