The expense factor is the percentage of your business deposits that a lender treats as operating costs and subtracts before it counts anything as income. On a bank statement loan, the default for business accounts is usually 50%. That means a business that deposits $30,000 a month is credited with $15,000 a month in qualifying income. With documentation, such as a CPA-certified profit and loss statement, the factor can sometimes come down to 35% to 40%, which raises the income you qualify on.
This guide shows where the factor sits in the math, how lenders choose it, how to document your real costs, and how to avoid the mistakes that shrink your qualifying income.
TL;DR
- The expense factor is subtracted from eligible business deposits before the total is divided by the months reviewed (12 or 24).
- Our standard factor on business accounts is 50%. With a CPA-certified P&L it can drop to 35% to 40%.
- A lower factor means higher qualifying income, but it has to match what your statements and records show.
- Personal account statements are treated differently from business statements, and the factor depends on which you use.
- Clean statements, a P&L and a bookkeeping trail are the three things that move the number most.
Table of Contents
- What the expense factor actually does
- Where the factor fits in the calculation
- How lenders decide which expense factor to use
- How to document your real expenses
- Business statements versus personal statements
- Mistakes that reduce qualifying income
- Perspective
- Run your own numbers
- Where the factor applies, and where it does not
- Talk to a loan officer about your factor
- FAQ
- Sources
What the expense factor actually does
Tax returns show income after write-offs. That is good for your tax bill and hard on a mortgage application, because a conventional underwriter works from the profit line. Bank statement programs take a different route. They look at the cash that moved through your account and ask how much of it was really yours to keep.
Business deposits are gross revenue. They include money that went straight back out for rent, payroll, inventory, software, subcontractors and fuel. The expense factor is the lender’s way of removing that spending without asking you to itemize every receipt. A 50% factor says that half of every deposit dollar is assumed to have gone to running the business.
Our bank statement loans follow this approach. We use 12 or 24 months of deposits to derive qualifying income instead of tax returns, and the expense factor is the biggest single lever in that calculation.
Where the factor fits in the calculation
The order of operations matters. Lenders generally work through the same sequence, which is described step by step in this walkthrough of bank statement income verification:
- Collect 12 or 24 consecutive months of complete statements.
- Total every deposit.
- Remove what is not income: loan proceeds, transfers between your own accounts, refunds, and large unusual deposits you cannot source.
- Apply the expense factor to the remaining business deposits.
- Multiply by your ownership share if you do not own 100% of the business.
- Divide by the number of months reviewed.
The factor is applied after the exclusions and before the division. One published example shows the effect: with $198,000 in qualifying deposits, a 40% factor leaves $118,800, and a 12-month lookback gives $9,900 a month.
A worked example at 50% and at 40%
Say your business account shows $360,000 in eligible deposits over 12 months, after removing transfers and a one-time loan deposit. You own 100% of the company.
| Step | At 50% factor | At 40% factor |
|---|---|---|
| Eligible deposits | $360,000 | $360,000 |
| Expense factor applied | -$180,000 | -$144,000 |
| Remaining | $180,000 | $216,000 |
| Divided by 12 months | $15,000 per month | $18,000 per month |
The same bank statements produce $3,000 more in monthly qualifying income at the lower factor. That difference can change the loan amount you qualify for and how your debt-to-income ratio looks. The figures are an illustration only and not an offer or commitment to lend.
If you own 60% of the business, multiply the remaining figure by 0.60 before dividing. In the 50% column that takes $180,000 to $108,000, or $9,000 a month. Ownership share is the step people forget when they estimate their own numbers.
How lenders decide which expense factor to use
The factor is not a law of nature. It is a lender guideline, and it varies by program and by lender. Several things move it.
Type of account. Business statements get an expense factor because deposits are gross revenue. Personal statements are often treated differently, since the account is assumed to hold money already paid to you. Programs that use personal deposits may apply a much higher share of deposits as income, sometimes counting them close to in full. We cover the difference in more detail in our guide to business income versus personal income on a mortgage.
Type of business. A consultant with no employees and a restaurant do not spend the same share of revenue on costs. Businesses with heavy labor, materials or inventory typically carry higher cost structures than solo service work, and underwriters take that into account.
Documentation. The default 50% is a stand-in for information the lender does not have. Give the lender better information and the stand-in can be replaced. Many programs allow a lower factor when a CPA or tax preparer documents your actual expense ratio. We allow the factor to come down to 35% to 40% with a CPA-certified P&L.
Credit and down payment. Our bank statement programs generally call for a minimum 620 credit score and 10% to 20% down. Stronger files give an underwriter more comfort. Exact terms depend on the full scenario.
How to document your real expenses
If your actual costs run well under 50% of revenue, documentation is how you prove it. The goal is a record that a third-party professional stands behind and that your bank statements support.
A CPA-certified profit and loss statement
This is the most direct route. A CPA or licensed tax preparer prepares a P&L covering the same period as your statements. It breaks out revenue and each expense category, and it states the expense percentage. The lender can then compare that percentage against your deposits.
For the number to hold up, the P&L revenue should roughly agree with your deposits. A P&L that shows $400,000 in revenue next to statements showing $250,000 in deposits raises questions rather than answering them.
Bookkeeping that matches the statements
Monthly reconciliation is what keeps books and bank activity in line. If you or your bookkeeper reconcile every month, categories are already assigned, and the P&L is easy to produce. Five basic bank reconciliation steps for small businesses are a good checklist if your records have slipped behind.
What your statements already show
Your statements are also evidence of cost. Debits for rent, payroll, loan payments and supplier payments show how much of each deposit left the business. That cuts both ways. A very low factor can overstate income when real costs are higher than the factor assumes, which would leave you qualifying for a payment the business cannot comfortably support. A factor that fits the activity in your account is better for you than one that looks good on paper.
Business statements versus personal statements
| Business statements | Personal statements | |
|---|---|---|
| What deposits represent | Gross revenue | Money already paid to you |
| Expense factor | Applied, commonly 50% by default | Typically handled differently, often with a much smaller reduction |
| Lower factor possible | Yes, with a CPA-certified P&L in our program | Depends on the program |
| Best for | Companies with a dedicated business account | Sole proprietors and freelancers who deposit income to a personal account |
A common problem is mixing. If client payments land in a personal account, but business expenses also run through it, the statements are hard to read. Opening a separate business account and routing everything through it for a few months makes your numbers cleaner for any underwriter, whichever program you choose.
Mistakes that reduce qualifying income
- Transfers counted as revenue. Moving money between your own savings and checking is not income. Expect those deposits to be removed.
- Large unexplained deposits. Gifts, loan proceeds and one-time windfalls need a source or they are excluded.
- Incomplete statements. Missing pages or months slow the file down and can lower the result.
- A P&L that disagrees with deposits. Keep the two close.
- Guessing the factor. Using 25% in your own estimate when the program starts at 50% leaves you disappointed later. Plan around the default and treat anything lower as an upside you document.
- Ignoring your debts. Qualifying income is only half the picture. The monthly payments on your other debts still matter for debt-to-income.
Perspective
We see the same pattern every week. A self-employed borrower has strong cash flow and a tax return that tells a very different story, because the write-offs that make sense for a business owner shrink the income line. The expense factor is how we get from deposits to a fair picture of what you earn.
Our view is that the factor should be earned, not guessed. Starting at 50% gives every file a consistent baseline. Where your CPA can show that your real costs are lower, we are glad to look at a 35% to 40% factor with a certified P&L, because that is the honest number for your business.
We also keep the process personal. A dedicated loan officer handles your file rather than a call center, so you can ask how your deposits, ownership share and documents will be treated before you apply.
Christopher Arco, NMLS #1281
Run your own numbers
You can estimate your income yourself before talking to anyone. Add up eligible deposits, subtract the factor, apply your ownership share and divide by the months. A free mortgage calculator then helps you see how that monthly income relates to a possible payment. Our own bank statement income calculator is built around this exact method.
For a fuller look at the 12-month version, see our guide to the 12 month bank statement income calculation.
Where the factor applies, and where it does not
The expense factor belongs to bank statement programs. Other loan types qualify you differently:
- Agency loans such as conventional loans rely on tax documentation for self-employed borrowers. Fannie Mae’s guide lays out the underwriting factors and documentation for self-employed borrowers, which is why heavy write-offs can limit what you qualify for there.
- DSCR loans for investors do not use your personal or business deposits at all. The property’s rental income qualifies the loan, and it applies to investment, non-owner-occupied property only. Our DSCR loans page explains the details.
- NONI loans serve foreign nationals and borrowers with no documentable income. See our NONI investment loans.
Program availability depends on where the property is. Owner-occupied bank statement loans and other consumer programs are available in California, Colorado, Oregon, Washington, Texas and Idaho. In other states we focus on business-purpose financing for investment property, such as DSCR, non-owner-occupied bank statement, NONI, bridge and commercial loans.
Talk to a loan officer about your factor
If you are self-employed and your tax returns do not show what your business really earns, we can walk through your deposits and tell you how they would be treated. Our bank statement loans use 12 to 24 months of deposits instead of tax returns, and we are a BBB A+ rated lender.
Have your last 12 months of statements and, if you have one, a CPA-prepared P&L ready. We will show you the math with your numbers. You can start at 1stnwm.com.
FAQ
What is a typical expense factor on a bank statement loan?
Fifty percent is the common default for business accounts, and it is our standard. Some scenarios allow a lower factor when a CPA or tax preparer documents your actual expense ratio. With a CPA-certified P&L, we can consider 35% to 40%.
Does a lower expense factor always help me?
A lower factor raises qualifying income, which can support a larger loan amount. It needs to be supported by your P&L and statements, though. The best factor is the one that reflects what your business actually spends.
Do I need a CPA to get a lower factor?
To move below the 50% default in our program, we look for a CPA-certified profit and loss statement. A CPA or licensed tax preparer who knows your books can prepare it. Without one, plan on the standard factor.
Is the expense factor applied to personal bank statements?
Business statements show gross revenue, so that is where the factor does its work. Personal statements are usually handled differently because the deposits already represent money paid to you. The details depend on the program, so ask your loan officer which applies to your account.
What credit score do I need?
Our bank statement programs generally call for a minimum 620 credit score with 10% to 20% down. Published guides show that lenders may require 620 or 700 depending on the program, so your score and down payment are reviewed together with the rest of the file.
Sources
- Bank statement income verification: how lenders calculate income
- Bank Statement Loan Expense Factor: How It Is Set
- What Is a Bank Statement Loan?
- Fannie Mae Selling Guide B3-3.5-01, self-employed borrower documentation
- Free US Mortgage Calculator
- Five Steps to Bank Reconciliation for U.S. Small Businesses
For illustration only. Not a commitment to lend. NMLS #1281. Equal Housing Lender.