Bank Statement Loan Income Averaging vs Two-Year Return Method

The Quick Read: The two methods measure different things. Deposit averaging starts with the money that hits your accounts, then trims it for business costs. The return method starts with net income after your write-offs. Deposit averaging tends to fit owners with heavy deductions. The return method fits borrowers whose filed returns already show the income they actually live on.

• Deposit averaging uses 12 months of statements on the programs in Lendmire’s wholesale network. Published industry norms run 12 to 24 months.
• The return method relies on filed traditional personal-income documentation, usually averaged across the years a lender uses.
• Big write-offs hurt you under the return method. Thin deductions often make it the cleaner choice.
• Neither method is easier. Each one trades paperwork for a different income number.
• Both are underwritten file by file, subject to lender guidelines.

Lendmire is a mortgage broker. It places these files with select lenders in its wholesale network and does not underwrite or approve loans. The sections below referee the two methods the way a broker who has seen both kinds of files would.

Side-by-Side

The table compares the two methods on structure only. The bank statement column reflects programs Lendmire places through its wholesale network. The return method column shows published industry norms, which vary by lender.

Key Terms Defined

Deposit averaging means adding up eligible deposits over the statement window and dividing by the number of months.

Expense factor is a percentage trimmed off business deposits to account for the cost of running the business. Lenders set it by program, and it is never a universal formula.

Lookback window is the span of history a lender reviews: 12 months of statements, or the tax years on your returns.

Add-back is a deduction on your return, often a non-cash item like depreciation, that a lender may count back as income. Treatment varies by program.

Non-QM describes loans that fall outside standard agency guidelines and use alternative documentation.

DTI is debt-to-income: your monthly debts divided by your qualifying monthly income.

What Each Method Actually Measures

Deposit averaging measures cash flow. The return method measures taxable profit. Those are rarely the same number for a self-employed borrower.

Say you run a business with real revenue and large depreciation or equipment write-offs. Your accountant did a good job lowering your tax bill. The same work lowers the income on your return. The bank statements still show money coming in at full volume.

That gap is the reason the bank statement option exists. Deductions are legitimate for taxes, but they can understate what the business brings in. Deposit averaging tries to read the cash side of the story, then subtracts a share for costs.

The reverse also happens. If your business is lean and your deductions are small, your return may match your cash reality. In that case, the expense factor on deposits can cut qualifying income below what your return shows.

Market scale tells you both paths are mainstream. HousingWire reports non-QM lending of about $239 billion, with bank statement loans making up 34% of that volume and DSCR loans 29%.

How Deposit Averaging Works, Step by Step

Deposit averaging is five steps: choose the window, screen the deposits, apply the expense factor, divide by months, and test the result. The result then runs through the lender’s debt-to-income check.

1. Pick the window. Across Lendmire’s wholesale network, the documented programs here use 12 months of statements, business or personal. Published industry norms span 12 to 24 months, per Scotsman Guide.

2. Screen the deposits. The underwriter removes transfers between your own accounts, loan proceeds, refunds, and one-time items that are not income.

3. Apply the expense factor. On business accounts, a percentage comes off the eligible deposits. Scotsman Guide uses 50% as an example, not a rule. A lower ratio typically needs third-party support, such as a profit-and-loss statement or an expense statement from a tax professional.

4. Divide by the months. The adjusted total becomes one monthly figure.

5. Run the DTI test. That figure goes against your monthly obligations, and the lender decides whether the file works.

Personal and business accounts can be treated differently. Some programs apply the expense factor only where business statements are used. Others review personal deposits on their own terms. This is a program-by-program call, and nobody should promise you a specific factor before a lender has reviewed the file.

Averaging does forgive uneven months. A seasonal contractor with a huge summer and a thin winter is judged on the whole stretch, not the worst month.

How the Two-Year Return Method Works

The return method takes the net income on your filed returns, usually across the years a lender uses, and converts it to a monthly figure. Published sources describe this side only in general terms, so treat the details below as industry norms that vary by lender.

The starting point is taxable income after write-offs. For a sole proprietor, that is the net profit line on the business schedule. For a partnership or S corporation, the lender looks at K-1 income and, in many programs, business returns. Some lenders add back non-cash items like depreciation. Others do not, or cap the add-back.

Averaging across years smooths a single bad or great year. It also drags down a borrower whose income is climbing. If the latest year is your best, the older year dilutes it. If the latest year is your worst, a lender may look harder at the trend instead of simply averaging.

Agency-backed conventional loans generally lean on this same two-year return approach for self-employed income. Non-QM programs exist partly because many self-employed borrowers do not fit that mold.

What Both Methods Have to Prove

Both methods answer the same underwriting question: can you repay this loan? A lender must reasonably determine that and verify the income it relies on with reliable third-party records. The CFPB’s ability-to-repay rule text lists tax-return transcripts and financial institution records among acceptable evidence. Bank statements are financial institution records.

The rule does not prescribe 12 or 24 months, an expense factor, or an averaging formula. Those come from the lender’s guidelines. The Federal Register’s final rule lists eight underwriting factors a lender must consider, including income or assets and debt obligations.

Occupancy decides the paperwork regime. An owner-occupied file, meaning a primary residence or second home, is a consumer mortgage, and TRID disclosures apply. A bank statement loan on a non-owner-occupied rental, including a short-term rental, is business-purpose and exempt from TRID. Check which one applies to your property before comparing programs.

When Bank Statement Averaging Is the Better Fit

Averaging is the better fit when your deposits are healthy but your returns understate your income. The strongest candidates have heavy write-offs, steady or rising deposits, and clean accounts.

Large deductions. Equipment purchases, depreciation, and aggressive expense planning shrink taxable income. Deposits show the business at full volume. A lender using the expense factor may land on a higher number than your return does.

Income that jumped recently. Two-year averaging blends a strong recent year with a weaker older one. A 12-month lookback focuses on the latest stretch. Across Lendmire’s network, the documented bank statement programs use that 12-month window.

Uneven or seasonal income. Averaging smooths peaks and valleys. A borrower with a few huge months and several slow ones is judged on the total.

Leverage on a primary residence. Select lenders in the network go up to 90% LTV on a primary residence purchase or rate-term refinance, and stronger files earn the top of that range. An asset-depletion alternative, qualifying from liquid assets, runs up to about 80% LTV on a primary residence.

Cash-out on an owner-occupied home. Owner-occupied cash-out on a primary or second home tops out at 80% LTV, depending on loan size and credit. That is lower than the 90% purchase ceiling. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.

Cash-out on an investment property. Cash-out on an investment property tops out around 75% LTV. Investment purchase leverage on bank statement documentation varies by lender, so treat any figure you hear as a question to ask.

Here is the catch. Averaging is not a shortcut around income. It is reviewed on documented income under the applicable program, subject to lender guidelines. Falling deposits, heavy overdrafts, and large unexplained deposits are all things an underwriter reads closely.

When the Two-Year Return Method Is the Better Fit

The return method is the better fit when your returns already show the income you need. That usually means light deductions, stable income, and a borrower who would qualify under standard documentation.

Lean deductions. If your business runs with few write-offs, your net income is close to your true income. Deposit averaging with an expense factor may cut a lean business too far.

A conventional path is open. If your two years of returns clear standard guidelines, the traditional route is worth a look before you move to non-QM. Lendmire’s piece Bank Statement HELOC vs Waiting for Two Years of Tax Returns covers that timing tradeoff.

Declining deposits. If deposits are sliding, a bank statement file shows that trend month by month. A return that averages earlier, stronger years may look better on paper. Underwriters still weigh the trend, so do not assume the average hides it.

Business ownership that is hard to document on statements. Multiple entities, mixed accounts, or recent ownership changes can complicate a statements file. Returns and schedules sometimes tell that story more cleanly. No neutral source covers these cases in detail, so program guidelines govern.

Same Borrower, Both Methods

Run the same business through each method and the answer can flip. These figures are an illustrative index, not market data or program terms. Treat 100 as the average monthly eligible deposits.

The first borrower wins with deposit averaging. The second wins with returns, because the expense factor example removes more than the business actually spends. A lower documented expense ratio, backed by a tax professional, could close that gap on the statements side.

This is a modeled example. Real factors vary by program, and every file is underwritten individually.

Risks and Underwriting Signals

Both methods have a downside, and deposit averaging gets more scrutiny for it. A few patterns raise questions:

• Padded deposits. Moving money between your own accounts inflates deposits. Underwriters strip it out.
• Overdrafts and low balances. Frequent overdrafts suggest the cash flow is thinner than the deposits imply.
• Ownership mismatch. The account holder should match the business owner.
• Large unexplained deposits. Expect to document the source.
• Declining deposits. Falling income is a flag in any method.

On the return side, the main risk is simple arithmetic: deductions shrink the number. A borrower who optimizes for taxes often pays for it at the qualifying table.

Which Documents Each Path Needs

For deposit averaging, plan on 12 consecutive months of statements for every account used, business or personal. Expect a request for explanations of large deposits, and possibly a profit-and-loss statement or a tax professional’s expense statement if you want a lower expense ratio.

For the return method, plan on filed returns for the years used, plus business schedules or K-1s as applicable. Reserves, commonly around 6 months of the housing payment on the bank statement programs in the network, are a separate question from either method.

What About a Rental Property?

If the property is a rental, a third option exists. A DSCR loan is reviewed primarily on property-level rental income covering the payment, subject to lender guidelines, instead of your personal income. Many full-time investors who are self-employed find that cleaner than either method. The details are in Lendmire’s complete DSCR loans guide.

Bank statement loans, by contrast, qualify the borrower. Lendmire’s article on whether a 40-Year DSCR vs 24-Month bank statement cash-out for steady income shows where that path fits. Tax treatment can depend on how the funds are used and how the property is held; investors should keep clear records and speak with a qualified tax professional before relying on any deduction.

The Verdict

Choose deposit averaging when your accounts show more income than your returns. Choose the return method when your returns already clear the bar and your deductions are modest. Run both numbers before you decide.

The real mistake is assuming one method is automatically better. Lean books and a clean two-year history favor returns. Declining income hurts you either way. Lenders in the network apply different expense factors and overlays, so the same borrower can look very different from one program to the next.

Next Step

Call 828-256-2183 to start.

About Lendmire

As a non-QM mortgage broker (NMLS# 2371349), Lendmire facilitates DSCR investor loans across 41 markets, including Washington, D.C. DSCR eligibility is generally reviewed around property-level rental income instead of personal income documentation, subject to lender guidelines, serving LLC-structured portfolios and self-employed borrowers who don’t fit conventional boxes. A two-time Scotsman Guide Top Mortgage Workplace (2025, 2026).

References

1. HousingWire: Non-QM Loans Guide

2. Scotsman Guide: Rev Up the Engine for Non-QM Lending

3. CFPB Regulation Z §1026.43

4. Federal Register: Ability-to-Repay and Qualified Mortgage Standards