How Excluded Deposit Rules Work on a Bank Statement Loan for a Contractor

The Quick Read: An excluded deposit is any credit on your statements that the underwriter removes before averaging, because it is a transfer, a loan, a refund, a gift, or a one-time sale rather than recurring earnings from your trade, and the removal lowers your qualifying income without ending the file. Each program writes its own list. The expense factor, the account type, and the paper trail behind each unusual deposit decide the final number.

• Underwriters tag every credit as earned revenue or something else, then average only the earned revenue.
• Transfers between your own accounts, loan proceeds, and refunds are the most common exclusions.
• Business statements usually carry an expense factor. Personal statements usually do not.
• Excluding a deposit shrinks the income figure. It does not deny the loan.
• Clean, separated accounts and documented explanations keep more of your real income in the calculation.

Key Terms Defined

Excluded deposit: a credit that the underwriter removes from the income calculation because it is not recurring earnings.

Eligible deposit: a credit that traces to client payments or other recurring business revenue and stays in the average.

Expense factor: a percentage applied to business-account deposits to estimate net income after costs.

Pass-through money: client payments that move straight out to subcontractors or suppliers and never become your profit.

Commingling: mixing personal and business activity in one account, which makes each deposit harder to trace.

Sourced deposit: a credit you can tie to an invoice, contract, draw schedule, or other third-party document.

What Counts as an Excluded Deposit on a Contractor’s Statements?

Any credit that is not recurring revenue from your work is a candidate for exclusion. Across the lenders in Lendmire’s wholesale network, the same families come up again and again: transfers between your own accounts, loan or credit-line draws, refunds, gifts, one-time asset sales, and cash with no paper trail.

The logic is simple. A bank statement loan is reviewed on documented income under the applicable program, subject to lender guidelines. Income means money your work produces month after month. A transfer from your savings account is your own money moving. Counting it would count the same dollar twice.

Most programs average 12 to 24 months of statements in place of traditional personal-income documentation, according to Scotsman Guide’s reporting on non-QM borrower groups, and guidelines vary by lender. The programs Lendmire places files with typically use 12 months of business or personal statements. The exclusion list is applied to every month in the window.

For the broader question of which non-business credits get screened out, see Lendmire’s piece on whether non-business deposits count on a bank statement loan and the excluded deposit rules.

How Does Underwriting Treat Each Deposit, Step by Step?

Underwriters work through the statements in a fixed order. The sequence below matches how most programs handle it, though the details differ by lender.

1. Choose the account type. Personal statements use deposits into personal accounts. Business statements use business-account deposits and then apply an expense factor.

2. Total the gross deposits. At this stage nothing has been removed.

3. Tag each credit. Every deposit is sorted into earned revenue or something else.

4. Strip the non-income items. Transfers, loan proceeds, gifts, refunds, and one-time sales come out.

5. Apply ownership share. If you own part of the business, only your share counts.

6. Apply the expense factor on business accounts. A common starting point is 50%, but it is a starting point, not a rule. Some lenders accept an accountant-prepared profit and loss statement that documents lower actual expenses, which can reduce the factor. No program is required to use any particular factor, and no one can promise yours in advance.

7. Average over the statement months. The result is the monthly qualifying income.

8. Review the rest of the file. Credit, assets, reserves, and the property still get reviewed. Underwriting on these files is mostly manual, as Scotsman Guide’s coverage of hands-on non-QM underwriting describes.

Four things decide the outcome: how traceable each deposit is, whether the account is personal or business, whether the expense factor is documented, and whether you can source anything that looks unusual.

Contractor Deposit Sort: What Usually Counts and What Rescues a Questioned Credit

This table shows typical treatment. The program sheet of the lender reviewing your file always controls.

Excluded does not always mean useless. Once you document where excluded money came from, it may still count as an asset for reserves or a down payment, subject to lender guidelines. Programs on the owner-occupied side typically look for reserves around 6 months of the housing payment.

Worked Example: One Contractor’s Lumpy Year

This example uses index points, not dollars. Treat every figure as a modeled assumption.

Say a contractor’s business account shows 100 index points of gross deposits over 12 months. The underwriter tags the credits:

Without the exclusions, the same 100 points at a 50% factor would show 50 points of income. With them, it shows 31. The exclusions cut qualifying income by about 38% in this example. The loan does not fail because of that. The file simply proceeds on the smaller number, and the leverage, loan size, or price range adjusts to match.

Lumpy income magnifies the effect. A contractor with one huge progress draw in a single month and thin months around it may see the underwriter judge large deposits against the account’s normal pattern, not against a fixed dollar threshold. Spread the work across steady billing and the average holds up better.

If the contractor’s actual costs run well below the default factor, an accountant-prepared profit and loss statement can change the math. The inputs stay the same. Only the factor moves.

What Happens With Subcontractor Pass-Through Money?

A contractor’s account can show large client payments that mostly flow out to subs and suppliers. That money passes through you and never becomes profit. Programs handle it in one of two ways. The expense factor may absorb it, or the deposits may be adjusted or excluded.

This is where contractors often get surprised. A general contractor running 70% subcontracted work can show impressive gross deposits and modest real income. Underwriters know the pattern. They look for it by comparing deposits to outgoing payments to the same names month after month.

The practical answer is to know which treatment your target program uses. Some lenders in the network lean on the expense factor alone. Others want to see the pass-through identified. If your true costs run far below or above the default factor, document them rather than hoping the file reads favorably.

Where Does the General Rule Break?

The general rule is that recurring earnings count and everything else comes out. Several edge cases bend it.

Commingled accounts. One account mixing personal and business activity makes every deposit harder to trace. Lendmire’s piece How Excluded Deposit Rules Work on a Bank Statement Loan for a Sole Proprietor covers the account-choice side in depth. The short version is that separation speeds the review and protects more of your income.

Payment apps and cash. Merchant processors and cash deposits get extra scrutiny. Cash with no paper trail is the hardest income to count.

Self-prepared profit and loss statements. A statement typed by the borrower is not independent verification. Programs generally want a profit and loss statement prepared by a third-party tax professional.

Businesses under 24 months. Scotsman Guide describes a borrower who sold a business, relocated, and started another one 12 to 15 months later. Files like that lean on assets and credit when the history is short.

Business and personal deposits stacked together. Adding both sets of deposits to raise income generally does not work, because it counts the same money twice.

Program differences. Personal versus business statements, combinability, and expense-factor flexibility all vary. A few lenders in the network allow more flexibility than the strictest overlays do.

How Do You Document a Questioned Deposit?

Underwriters ask for explanations when a deposit looks large for your pattern, round, or untraceable. A good response ties the credit to a document.

A short letter of explanation typically covers four points:

• The date and amount of the deposit.
• The source, named plainly (client, lender, asset sale).
• Whether it is recurring business revenue or a one-time event.
• The attached proof: invoice, contract, draw schedule, bill of sale, or the matching statement from the other account.

Keep it factual and short. Programs that review files manually respond better to clear paper than to long stories. Where a deposit cannot be documented, expect it to come out of the income average.

Why Do Lenders Exclude Deposits at All?

Lenders exclude certain deposits because they must verify the income they rely on. Under the federal ability-to-repay framework, a creditor generally cannot rely on a consumer’s own statement of income. The CFPB’s small-entity compliance guide on ability-to-repay and qualified mortgage rules defines third-party records as records prepared by someone other than the consumer, the creditor, the mortgage broker, or their agents. Bank statements are one of the record types that can verify income.

The rule does not hand lenders a list of excluded deposits. Each program writes its own, which is why the treatment varies. For an owner-occupied purchase or refinance, the loan is a consumer mortgage and the consumer disclosure rules apply. A bank statement loan on a non-owner-occupied rental, including a short-term rental, is business-purpose and exempt from those disclosure rules. Occupancy decides the regime, so confirm it before comparing files.

Non-QM was roughly 5% of all originations in the latest data, and the average non-QM borrower carried a 776 FICO, according to Scotsman Guide’s reporting on non-QM lending. These are not subprime files. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.

Which Loan Lane Fits a Contractor Who Owns Rentals?

It depends on what you are financing, and the answer flips with occupancy.

If you are buying a home to live in, a second home, or pulling cash out of an owner-occupied property, bank statements are the documentation path where deposit rules matter most. On select lenders’ programs, leverage typically reaches up to 90% LTV on a primary residence purchase or rate-term refinance. Owner-occupied cash-out on a primary residence or second home typically tops out at up to 80% LTV with a fixed expense ratio, and 75% with an accountant-prepared ratio. A cash-out on an investment property typically tops out around 75% LTV. Loan sizes run roughly $125,000 to $3,500,000, subject to lender guidelines, credit, and file strength. Qualifying from liquid assets instead of deposits can reach about 80% LTV on a primary residence. Investment purchase leverage on bank statements varies by lender.

If you are buying a rental, DSCR is often the cleaner path. Many DSCR loans qualify primarily on property-level rental income covering the payment, subject to lender guidelines. Scotsman Guide’s reporting on which groups are driving non-QM lending makes the same point about DSCR products. Your messy deposits matter far less there. Lendmire’s complete DSCR loans guide walks through that lane.

Tax treatment can depend on how the funds are used and how the property is held; borrowers should keep clear records and speak with a qualified tax professional before relying on any deduction.

The decision comes down to which documents are cleaner. A contractor with tidy business statements and a rental with strong rent may do well on either path. A contractor with commingled accounts and a strong rental usually does better on DSCR. Consumer licensing for the owner-occupied lane covers 16 states, so confirm availability for your property.

Pre-Application Checklist

Good cleanup starts months before the file does.

• Keep business and personal accounts separate.
• Label transfers between accounts, and avoid moving large sums back and forth.
• Pre-source loan proceeds, equipment sales, and insurance payouts with documents.
• Keep invoices, contracts, and draw schedules for every large client payment.
• Get an accountant to prepare a profit and loss statement if your real costs run below the default factor.
• Keep large one-time items out of the operating account.
• Gather 12 months of consecutive statements for every account in play.

Next Step

Qualification is subject to lender guidelines, and every file is reviewed individually; this is not a commitment to lend.

Contractors who keep their accounts clean usually find that most of their real earnings survive the sort.

About Lendmire

Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. Bank statement, P&L-only, 1099-only and asset-based mortgages are arranged through wholesale lending partners for borrowers whose traditional personal-income documentation understates their income, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Scotsman Guide, “Which groups are driving non-QM lending?”

2. Scotsman Guide, “Helping borrowers fit the boxes by getting hands-on with non-QM”

3. CFPB ATR/QM Small Entity Compliance Guide