How the Bank Statement Income Formula Works for a Sole Proprietor Borrower

The Quick Read: A lender averages the eligible deposits across 12 months of statements, then subtracts an expense factor if the account is a business account. The result is monthly qualifying income, which is tested against the borrower’s total debts. The lender sets the expense factor, not the borrower. A documented lower factor can raise counted income on the same deposits.

• The formula: eligible deposits ÷ months in the window × (1 − expense factor) = monthly qualifying income.
• Eligible deposits: only real business or personal earnings count. Transfers, loan proceeds, gifts, refunds and unexplained large deposits come out.
• Account type matters: business statements carry an expense factor. Personal-account programs may count deposits at up to 100%, depending on the program.
• Ownership share: a sole proprietor owns 100% of the business, so this input never reduces the result.
• The test that follows: qualifying income is compared with the new mortgage plus every other monthly debt. A bank statement file is not a rental-income file.

Key Terms Defined

Eligible deposits. These are the credits to an account that an underwriter accepts as earnings from the borrower’s own work.

Expense factor. This is the share of business deposits the lender assumes went to running costs. It is subtracted before income is counted.

Qualifying income. This is the monthly figure the lender uses in the debt test after deposits are screened, averaged and adjusted.

Lookback window. This is the number of months of statements reviewed. Most programs in Lendmire’s wholesale network work from 12 months of business or personal statements.

Ownership percentage. This is the borrower’s share of the business. A sole proprietor is at 100%, so the input is present but changes nothing.

DTI. Debt-to-income compares the borrower’s total monthly obligations with qualifying income.

Why Bank Statement Income Exists for a Sole Proprietor

A sole proprietor often looks smaller on a tax return than in the bank account. Write-offs reduce taxable profit. That is good for the tax bill and awkward for a mortgage file that reads net profit.

Bank statement programs start from cash that actually moved through the account. Lendmire brokers these loans through select lenders. Qualification rests on documented income under the applicable program, subject to lender guidelines.

The borrower still has to prove the income. Deposits are reviewed line by line, and the lender documents which credits it relied on.

How the Bank Statement Income Formula Works for a Sole Proprietor Borrower, Step by Step

The sequence below is how underwriting typically treats the file. Details shift by lender, but the order rarely does. A StatementsReady explainer lays out a similar sequence.

Step 1: Pick the account and the window. A sole proprietor may run revenue through a personal account or a dedicated business account. Programs commonly review 12 months of statements. Some lenders allow a longer window.

Step 2: Screen the deposits. The underwriter removes credits that are not earnings. That means transfers between the borrower’s own accounts, loan proceeds, gifts, refunds and unexplained large deposits.

Step 3: Average what is left. The eligible total is divided by the number of months in the window. One strong month does not carry the file. One weak month does not sink it.

Step 4: Apply the expense factor. Business-account deposits are reduced by the factor. For personal accounts, an InSync calculator page describes counting deposits at up to 100%, adjusted by ownership share. Treat that as a description of how some programs work, not a rule for every lender.

Step 5: Support a lower factor, if you can. A CPA, enrolled agent or other qualified preparer can certify actual expenses in writing or supply a prepared profit-and-loss statement. Market explainers commonly describe 50% as the default when no support exists. Across the wholesale network Lendmire works with, the factor varies by lender, business type and documentation. No single percentage applies to every file.

Step 6: Run the debt test. Monthly qualifying income is compared with total obligations, including the new mortgage. Rental properties the borrower already owns and other debts count too.

What Each Deposit Type Does to the File

Personal or Business Statements for a Sole Proprietor?

A sole proprietor under their own name often has the choice. The right account is usually the one that holds the cleanest record of earnings. It is not the one that produces the biggest number on paper.

Mixed accounts are the common complication. Many lenders resist files where personal spending and business revenue share an account. Some allow it with more explanation. A borrower who has been commingling funds should expect more questions about deposits.

A separate business account opened now does not fix the past. It does give later months a cleaner record, which can help on a later file.

The Sole Proprietor Walkthrough, End to End

The figures below are modeled assumptions for illustration. They are not market data.

Picture a sole proprietor with 12 months of business statements. Total credits include some transfers from a personal savings account and one loan deposit. The underwriter strips those out. What remains is the eligible total, which is averaged across 12 months.

Now the factor does its work. At a 50% factor, half of each eligible dollar counts. Say the borrower documents a 35% factor through a CPA-prepared profit-and-loss statement, and the lender accepts it. Then 65 cents of every eligible dollar counts. Since 65 ÷ 50 = 1.3, qualifying income rises about 30% on identical deposits. Lender acceptance is not automatic, and the factor is the lender’s decision.

The same math runs backward. To reach a target monthly income, divide it by (1 − factor). At a 50% factor, the borrower needs eligible average deposits of about twice the target. At a 35% factor, about 1.54 times. A borrower who wants to know how much revenue the file requires can start there.

Finally, qualifying income meets the DTI test. A borrower with several existing debts can have strong deposits and a weak DTI. The formula only produces income. It does not guarantee the debt test passes.

Lendmire’s piece How a Sole Proprietor Turns Deposits Into Bank Statement Loan Income goes deeper on deposit cleanup.

Where the General Rule Breaks

Missing documentation. A borrower who claims a lower factor but cannot produce preparer support falls back to the lender’s default. Verbal explanations rarely substitute.

Pass-through deposits. A contractor who collects money that flows straight to subcontractors may see those deposits excluded or hit with a higher effective factor.

Industry factors. Some lenders apply higher factors to expense-heavy trades. A restaurant and a consultant do not carry the same cost structure, and underwriting reflects that.

Seasonal or declining deposits. A 12-month average smooths a seasonal business. A longer window can drag the figure down if recent months are the strongest. Lenders also look at the trend. A business with falling deposits faces more questions than the average alone suggests.

Hybrid files. A co-borrower with traditional employment income can sometimes be combined with a bank statement borrower. Other self-employed documentation types exist as well. The lender decides which fits.

Who counts as self-employed. Lenders generally treat a Schedule C filer, a 1099 contractor or a borrower with 25% or more ownership of a business as self-employed. A single-member LLC that files as a disregarded entity usually lands in the same category.

Bank Statement Income Versus a Tax-Return File

The same sole proprietor can be underwritten two ways. Here is how they differ.

A heavy write-off year can leave very little qualifying income on a return. That is the situation where bank statement documentation tends to help. If the return already shows strong net profit, the return-based path can be simpler. A borrower should not switch documentation types just to get a larger number.

Tax treatment varies; consult a qualified professional.

Verification Is Still Required

Bank statement loans sit outside the standard qualified-mortgage box, but verification is not optional. The CFPB small entity compliance guide explains that lenders must verify the income, assets and debts they rely on. That is why deposits are screened and documented.

Occupancy decides the disclosure regime. An owner-occupied file, such as a primary residence or second home, is a consumer mortgage, and TRID applies. A bank statement loan on a non-owner-occupied rental, including a short-term rental, is business-purpose and exempt from TRID. The two regimes should not be mixed.

Where Leverage and Loan Size Land

These are typical ranges from select lenders in the wholesale network, subject to lender guidelines. They are not commitments.

• Primary residence purchase or rate-and-term: up to 90% LTV, with stronger files earning the top of the range.
• Owner-occupied cash-out (primary or second home): up to 80% LTV with a fixed expense ratio, and 75% with an accountant-prepared ratio.
• Investment-property cash-out: tops out around 75% LTV.
• Investment purchase on bank statement documentation: varies by lender.
• Asset-depletion alternative: qualifying from liquid assets runs to about 80% LTV on a primary residence.
• Loan sizes and reserves: roughly $125,000 to $3,500,000, with reserves commonly around six months of the housing payment.

Term structures follow each lender’s program sheet. Long-term and interest-only options are mostly a DSCR-side offering, so a borrower should not assume a bank statement file carries them.

Bank Statement or DSCR? The Decision in Practice

The deciding question is whether the property’s rent can carry its own payment. Use bank statement documentation when qualification has to rest on personal income. That usually means a primary residence or a hybrid file. A bank statement approval counts every other debt against the borrower.

A rental purchase is different. A DSCR loan is reviewed primarily on property-level rental income covering the payment, subject to lender guidelines, and personal DTI is not the test. Programs below 1.00 coverage are available through select lenders, with adjusted leverage and terms.

An investor with strong rents and heavy personal debt often fits DSCR better. A self-employed borrower buying a home to live in has no rental income to lean on, so bank statement is the practical route. Lendmire’s complete DSCR loans guide covers the rental side in full.

A borrower pulling equity from a high-value home should also read Lendmire’s piece Should a Jumbo Cash-Out Borrower Switch to Bank Statement Income?.

Misconceptions Worth Clearing Up

“It means income isn’t checked.” Documentation is not optional. Every deposit the lender relies on is reviewed.

“Every deposit counts.” Transfers, loan proceeds and unexplained large deposits are excluded.

“50% is a federal number.” It is not. The percentage is a lender or investor guideline.

“I can choose my factor.” The lender sets it based on business type and documentation.

“A CPA letter always lowers it.” It helps, subject to lender acceptance and underwriting review.

“A longer window always helps.” It smooths seasonality, but it can lower the average when recent months are strongest.

An illustrative calculator on the site can give a rough sense of the numbers, but it is not a quote.

A sole proprietor who cleans up deposits, separates accounts and gets preparer support in order tends to give underwriting less to question and more to count.

About Lendmire

Lendmire, NMLS# 2371349, is a mortgage brokerage focused on investor financing, arranging DSCR loans in 40 states plus Washington, D.C. — 41 markets total. Qualification is based on the property’s income rather than personal income documentation, subject to lender guidelines, making it a fit for LLC-held rentals and scaling portfolios. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. StatementsReady explainer

2. InSync bank statement calculator

3. CFPB small entity compliance guide (March 2016)