Expense factor / expense ratio
The percentage of bank deposits a lender treats as business expenses when calculating qualifying income on a bank statement loan. At a 50% factor, $30,000/month in deposits produces $15,000/month of qualifying income. A CPA letter documenting actual expenses can sometimes reduce the factor to 40% or below — a meaningful increase in qualifying income on the same deposits.
How it works in practice
The factor exists because business deposits are revenue, not profit — some portion pays the business's own costs. Lenders default to an assumption, most commonly 50%, and adjust by business type: a solo consultant with a laptop might merit 30–40%, while a restaurant or retailer with inventory and payroll can be assessed 60% or higher. The factor applies to business-account programs; personal-account deposits are usually credited near fully.
The arithmetic makes the stakes obvious. On $40,000 of average monthly deposits, a 50% factor yields $20,000 of qualifying income; a 35% factor yields $26,000 — a 30% raise from the same bank statements. That difference routinely decides whether a target purchase price fits under the program's DTI ceiling, which is why the factor is worth negotiating with evidence rather than accepting as quoted.
The evidence is usually a CPA letter attesting to your actual expense ratio, sometimes a prepared profit-and-loss statement consistent with the deposits. Lenders differ in what they accept and how low they'll go — same borrower, same statements, materially different qualifying income across lenders. It's one of the few underwriting inputs you can shop directly, so ask every bank statement lender for their default factor and their documented-reduction policy.
Common questions
Who decides my expense factor?
The lender sets it from your business type and NAICS-style category, then adjusts if you document actual expenses — typically via a CPA letter. It's program policy, not law, which is exactly why quoting multiple lenders pays.
Does the expense factor apply to personal bank statements?
Generally no — personal-account programs credit deposits at or near 100%, on the theory that business expenses were paid from a separate business account before the money reached you. Mixing business expenses through the personal account undermines that theory and invites scrutiny.
Related terms
- Letter of explanation (LOE) — A written statement from the borrower explaining an unusual item in the application: a large deposit, a credit…
- YTD P&L — A profit-and-loss statement covering the current year to date — from January 1 through the application month.…
- Verification of Employment (VOE) — A document or direct lender contact that confirms your employment status, position, and income. For self-emplo…
- VOD (Verification of Deposits) — Bank confirmation of account balances, used to verify down payment and reserve funds. Lenders may request VODs…
- Tax transcripts (IRS 4506-C) — The IRS form lenders use to request your tax transcripts directly from the IRS, verifying that the returns you…
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Sources
Educational definition only — not financial, legal, or tax advice. Programs and limits change; verify current terms with a licensed professional.