Expense Factor
The percentage a bank statement lender subtracts from your deposits to estimate business expenses, leaving the qualifying income they will actually count.
What the Expense Factor Is
The expense factor (or expense ratio) is the percentage a bank statement loan lender subtracts from your deposits to account for the cost of running your business. Lenders can't count every dollar that lands in your account as profit — some of it pays for materials, contractors, software, and overhead — so they apply an expense factor and treat what's left as your qualifying income.
How It's Determined
Lenders set the expense factor in a few ways:
- Fixed factor. Many programs apply a flat percentage — commonly a larger one for business statements and a smaller one for personal statements, since personal-account deposits are assumed to already be post-expense.
- CPA-stated expense ratio. A CPA letter documenting your actual expense ratio can replace the lender's default. If your real expenses are lower than the standard factor, this raises your qualifying income.
- Industry-based. Some lenders vary the factor by business type, recognizing that a software consultant has far lower overhead than a general contractor.
A Worked Micro-Example
A freelance copywriter deposits $20,000/month into a business account. With a default 50% expense factor, the lender counts:
$20,000 × (1 − 0.50) = $10,000/month of qualifying income.
Her real overhead, though, is tiny — mostly a laptop and software. Her CPA writes a letter stating a 20% expense ratio. The lender now counts:
$20,000 × (1 − 0.20) = $16,000/month.
That $6,000/month swing — $72,000 a year — comes entirely from documenting a lower, accurate expense factor.
Why It Matters for the Self-Employed
The expense factor is the most negotiable lever in a bank statement loan, and most borrowers don't realize it's adjustable. Two identical applicants can receive very different approvals depending solely on whether they let the lender apply a generic factor or proactively documented a lower one.
Practical tips:
- Ask each lender how it sets the expense factor and whether a CPA letter can lower it — policies vary widely.
- Keep business and personal banking separate. Co-mingled accounts force lenders toward higher, more conservative factors.
- Match account type to program. If your personal account already reflects post-expense income, a personal-statement program with a lighter factor may count more than a business-statement program.
A low, well-documented expense factor can change a marginal approval into a strong one. It's worth a conversation with both your lender and your CPA before you ever pull statements.
Apply This Concept
Related Terms
Bank Statement Loan
A non-QM mortgage that qualifies self-employed borrowers on the deposits flowing into their bank accounts — typically 12 or 24 months of statements — instead of on tax returns.
Bank Statement Program
A lender's specific set of rules for a bank statement loan — how many months it reviews, whether it uses personal or business accounts, and what expense factor it applies — which varies widely from lender to lender.
Qualifying Income
The income figure a lender actually uses to approve your loan and calculate your debt-to-income ratio — which, for the self-employed, is rarely the same as either your gross revenue or your gross pay.
Profit and Loss Statement
A financial statement summarizing a business's revenue, expenses, and net profit over a period — used by lenders, often when CPA-prepared, to document a self-employed borrower's income.
Add-Backs
Non-cash or non-recurring deductions a lender adds back to your net profit when calculating qualifying income — because they lowered your taxable income without actually reducing your cash flow.
Related Articles
CPA Letter for a Mortgage: P&L, Expense-Ratio, and How Self-Employed Borrowers Use Them
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Asset Depletion Loan: How the Divisor Math Actually Works
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1099 Income Mortgage: Qualifying as an Independent Contractor
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A no tax return mortgage qualifies you on bank deposits, assets, a P&L, or 1099s instead of your tax-return net. Here are the four programs, what they accept, and the trade-offs.
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