Bank Statement Loan Expense Factor, Explained

What the expense factor is

An expense factor is the share of business-account deposits a lender assumes went to running the business. Deposits into a business account are gross revenue. A mortgage needs net income, the part you could put toward a payment. Without tax returns to show the business's real costs, the lender estimates them with a factor and treats what remains as qualifying income.

The factor is the single largest lever in a business-statement file. Two lenders looking at the same twelve months of deposits can produce very different qualifying figures because one applied a default factor and the other accepted a CPA letter. Understanding how the factor is set, and which account your income should run through, is worth more than almost any other preparation you can do.

Personal-account programs usually skip the factor entirely. The reasoning is that money reaching your personal account has already had the business's bills paid ahead of it. That difference between the two account types is where most of the surprises in this category come from.

Personal statements vs business statements

Personal-account programs

When the statements come from a personal account, most programs count eligible deposits in full, with no expense factor. The lender still verifies that the business exists and that you own it, and it still removes transfers, refunds, gifts and other non-income credits. But the deposits that survive are treated as net.

Two conditions usually apply. First, the lender wants to see that the deposits actually come from your business, most often as recurring transfers or owner draws from a business account you can document. Second, if client payments land directly in the personal account, so that you are effectively running the business through it, some lenders treat those deposits as gross and apply a factor anyway. Rules on this point vary by lender, and it is worth asking before you decide which statements to submit.

Business-account programs

When the statements come from a business account, deposits are gross revenue and the factor applies. Lenders set the default factor in several ways. Some use one flat ratio for every business. Some vary it by business type, on the reasoning that a consultant keeps more of each dollar than a restaurant. Some look at the number of employees or whether the business carries inventory. And many allow the default to be replaced by a documented figure, which is the subject of the next section.

As a hypothetical example, suppose a business account shows eligible deposits averaging $20,000 a month. Under a default factor of one-half, a common starting point at many lenders though ratios vary, qualifying income is $10,000 a month in this example. If the lender instead accepts documentation that the business's true expense ratio is closer to one-quarter, qualifying income in the same illustration rises to $15,000 a month. Same deposits, same business, a materially different loan.

In the bank statement income calculator, switch to business statements and test any factor against your own deposits.

One vocabulary trap. Some lenders quote the factor as the share the business spends, others as the share it keeps, so a 'fifty percent factor' can mean the same thing on two rate sheets or opposite things on two others. Ask which way a program states it before you compare quotes, and read every example in this article as the expense share.

How a CPA letter or expense questionnaire changes the factor

Most business-statement programs offer at least one way to replace the default factor with something closer to reality. The three common instruments are a CPA letter, an expense questionnaire and a profit-and-loss statement.

• CPA or tax-preparer letter. A licensed CPA, enrolled agent or tax preparer states the business's expense ratio based on their knowledge of the books. The lender may verify the preparer's license and independence. Many lenders set a floor below which no letter will take the factor, and some require the letter to cover the same period as the statements.
• Expense questionnaire. You complete a form describing the business: what it sells, whether it carries inventory, rents space, employs staff or subcontracts work. The lender uses the answers to place the business in an expense band. Some lenders use the questionnaire alone; others use it alongside a letter.
• Profit-and-loss statement. A P&L for the statement period, prepared or reviewed by a CPA, gives the lender a net-income figure to compare with the deposits. Some programs then use the lower of the P&L net income and the deposit-based figure, as a reasonableness check.

Two cautions. A preparer signs a letter on their professional license, and a good one will not state a ratio the books do not support. Shopping for a number is not a strategy. And a letter that produces a very low factor for a business that obviously has costs, such as a contractor with materials and crews, invites the underwriter to look harder rather than less.

Why the wrong account can halve the qualifying figure

Here is the mistake that costs self-employed borrowers the most. Income flows from clients into a business account, and the borrower submits business statements because that is where the money lands. The lender applies its default factor to gross deposits. Meanwhile the business has very few real expenses, so the personal account, fed by owner draws, would have shown nearly the same figure with no factor at all.

As a hypothetical example, suppose a consultant bills $15,000 a month and the business's actual costs are about $2,000 a month. Three routes, three answers, all in this example:

• Business statements with a default factor of one-half (illustrative): qualifying income of $7,500 a month.
• Business statements with a CPA letter supporting the actual ratio (illustrative): qualifying income near $13,000 a month, subject to the lender's floor.
• Personal statements showing documented monthly owner draws (illustrative): qualifying income of $13,000 a month, with no factor, on programs that count personal deposits in full.

The gap between the first route and the other two is the difference between an income figure that supports the purchase and one that does not. It is also entirely avoidable, because it comes from the paperwork route rather than from the business.

The reverse mistake exists too. A business with heavy real costs, such as a retailer or a builder, sometimes fares better under a default factor than under a letter that states its true ratio. And a borrower who runs client revenue through a personal account can end up with a factor applied anyway, plus questions about commingled spending. The lesson is not that one account type is better. It is that the route should be chosen on purpose, ideally before the statement window begins.

Deciding which route to take

• Low-expense business (consulting, professional services, software): personal statements with documented owner draws, or business statements with a CPA letter. A default factor will understate you badly.
• High-expense business (construction, retail, restaurants, transport): run the numbers both ways. A default factor may be no worse than your real ratio, and it avoids the letter.
• No clean twelve months of personal transfers: business statements are the practical choice. Start moving regular owner draws now so the personal route is open next time.
• Multiple businesses or partial ownership: expect the lender to trace deposits to the entity you have documented, and to apply ownership rules that vary by program.

Whatever the route, keep the accounts clean for the whole window. Personal spending from a business account muddies the factor conversation, and business revenue landing in a personal account muddies the no-factor argument.

What to do next

Model both routes with the bank statement income calculator, once as business deposits with a factor and once as personal deposits without one. Then read the bank statement loan program page for how the rest of the underwrite works.

The window matters as much as the factor: see 12-month vs 24-month bank statement loans. And before you commit to any non-QM path, run the conventional numbers first. The same personal-versus-business question decides a bank-statement HELOC; see HELOC for the self-employed. When you want the routes compared on your real statements, start here.