When people apply for a traditional mortgage, they usually have to provide Form W-2 and tax returns as proof of income, as well as many other documents.

If you are buying a home as a self-employed borrower, independent contractor, or gig worker, you may not have a W-2 to show the mortgage lender. Business owners often have complex tax returns that do not accurately reflect their income because they may deduct large amounts of business expenses.

The solution provided by some mortgage lenders is a bank statement loan that relies on your commercial bank statement to prove your income and expenses and help determine how much you can borrow. This is perfect for homebuyers who don’t have a “traditional” source of income.

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The bank states that the loan is part of a loan category called a “unqualified mortgage” or non-QM loan that does not meet the mortgage standards established by the Consumer Financial Protection Bureau (CFPB). Qualified mortgages (QM loans) can be purchased by Fannie Mae or Freddie Mae MAC, which usually results in a traditional mortgage that requires only a 3% down payment, but non-QM loans cannot.

Banks state that loans are regulated in the same way as government-supported loans, such as the Federal Housing Administration (FHA loan), the U.S. Department of Veterans Affairs (VA loan), or the U.S. Department of Agriculture (USDA loan).

Not all lenders offer this type of home loan because they are less regulated and have different approaches for qualified borrowers, making it a bit risky. Borrowers also have less consumer protection, so it is important to understand the terms of the loan to avoid, such as balloon payments or negative amortization (this is when your mortgage principal increases rather than decreases over time).

Bank statement loans usually charge higher interest rates than traditional mortgages and may require higher down payments – usually at least 10%.

Banks declare that loans are ideal for borrowers who need more flexible standards to be eligible for mortgages. If you own a business, or an entrepreneur who has at least one or two years of age, and your business is worth at least one or two years of deposit, you may benefit from a bank statement loan.

Likewise, self-employed individuals and independent contractors who can record their income from work for 12 to 24 months are more likely to obtain bank statement mortgages than traditional or FHA loans. If you rely on income from real estate investments, a bank statement loan may also be a good option.

However, the bank states that the loan still requires borrowers to prove that they are financially justified. You still need a good credit score and sufficient income history to qualify.

Since banks declare that loans are more flexible than traditional mortgages, lenders can set their own standards for borrowers. Depending on the company, you can get bank statement loans for the primary residence, second home and investment properties.

Borrowers are eligible based on their credit score, cash flows proven by the bank statement, and debt-to-income ratio.

In return for these flexible qualities, lenders usually charge higher rates and require a down payment of at least 10%. In contrast, other mortgage types generally accept 0% to 3.5% down payments, depending on the loan you choose.

While the demand varies from one lender to another, borrowers usually have to provide the following:

• 12 to 24 months bank statement

• Minimum credit score is 620 (some lenders need at least 700)

• Maximum debt-to-income ratio is 50%

• 10% down payment

• Provide adequate cash reserves as required by the lender

• Profit and loss statement of its business

learn more: Can you get a home loan without a credit score? Yes - that's the way.

Banks provide flexibility for mortgage loans, but not without risks, for borrowers who may struggle to qualify for traditional loans.

• Ability to use only bank statements instead of W-2 for mortgage eligibility

• More flexible amounts you can borrow

• Flexible loan terms with a duration of up to 40 years

• Minimum down payment at least 10%

• Potentially unusual loan features such as balloon payment or negative amortization

• Higher interest rates

• Due to the loose income qualification, it may be difficult to pay a mortgage monthly.

Read more: How many houses can you afford? Use our home affordability calculator.

There are other types of mortgage loans in addition to bank statement loans, depending on the lender’s requirements and your personal financial situation. You may be eligible for one of the following financing options:

• Regular loans Revenue is usually verified through tax returns, but down payment requirements and interest rates are lower than bank statement loans.

• VA Loan Open to veterans and military members, with variable income requirements and no down payment requirements.

• FHA Loan Verified income is required, but the credit score requirements are low.

• USDA loan Tax returns are usually required, but are beneficial for low-income borrowers who purchase in rural areas.

• Portfolio Loanslenders stay in their portfolios rather than selling them to investors, usually with more flexible requirements - but they may charge higher rates.

Some mortgage lenders offer other less common options, often with higher down payment requirements and/or interest rates. Here are some alternatives to banks stating mortgage loans.

• Exhausted loans Also known as an asset qualifier loan, it allows you to qualify for a mortgage with current assets, such as a retirement account instead of income.

• 1099 Income Loan Use 1099 income statements received by freelancers and contract workers. You need good credit and a proof of income of 1099 for at least six months. (If you haven't served as 1099 employees for six months, talk to the loan officer about your options.)

• DSCR Loan (Debt Coverage Loan) Used to purchase the investment property you intend to rent out, eligibility is based on rental income analysis rather than personal income.

• Profit and loss loan, These are based on your business’s profit and loss statement for one or two years. However, you may still need to provide bank statements from the past few months.

Traditional mortgages are usually lower in interest rates and down payment requirements than bank statement loans. However, a bank statement loan can be a powerful option for borrowers who are not eligible for a traditional mortgage.

The amount you can borrow depends on your mortgage lender and your personal financial situation. Typically, the minimum limit for a bank statement loan is about $150,000, up to $4 million.

No, not all mortgage lenders offer bank statement loans. Among those who do this, each lender has different requirements, so you can meet one lender, but not one. Some famous lenders with bank statement loans are off-road mortgage and angel oak mortgage solutions.

While lenders can change their down payment requirements based on their individual circumstances, most lenders require at least 10% down payment bank statement loans.

Laura Grace Tarpley Edited this article.