Set The Expense Factor On A Second-home — The Quick Read: The expense factor is the percentage an underwriter subtracts from your business bank deposits before counting the rest as income. Most files use a fixed ratio tied to your business type — 20% for a service business with no employees, 40% for a small staff, 50% for larger or product-based businesses — or a lower, documented ratio from an accountant. On a second-home file, that number can swing your qualifying income by tens of thousands of dollars a month, which directly changes how much house you can buy.
What Is an Expense Factor, in Plain Terms?
An expense factor is a haircut applied to gross business deposits to estimate real, spendable income. Lenders assume every business has overhead — payroll, rent, supplies — so they won’t count a dollar of revenue as a dollar of income. Instead, they multiply average monthly deposits by one minus the expense factor to land on a number they’ll actually use for qualifying.
This only applies to business accounts. Personal bank statements are handled differently — eligible deposits are averaged directly, with no expense deduction applied, because the assumption is that personal deposits already reflect take-home money rather than gross business revenue.
Key Terms Defined
Expense factor (or expense ratio): the percentage subtracted from gross business deposits before the remainder counts as qualifying income.
Qualifying income: the monthly income figure an underwriter actually uses to run debt-to-income, after the expense factor has been applied.
CPA letter: a signed statement from an accountant, enrolled agent, or qualified tax preparer that documents a business’s real expense ratio, used to replace a lender’s default fixed percentage.
Second home: an occupancy category where the borrower personally uses the property; rental income from that specific property generally cannot be used to help the file qualify.
Bank statement program: a non-QM loan type that verifies income from deposit history — personal or business — instead of traditional personal-income documentation, built for self-employed borrowers whose returns understate real cash flow.
How the Expense Factor Gets Set, Step by Step
Across the wholesale network Lendmire works with, the process runs the same way on most files:
1. Pick the statement type and window. Business or personal statements, 12 or 24 consecutive months. Most programs in the network run 12 months; a few will go to 24 if the borrower wants a longer average.
2. Confirm business ownership. Business bank statements generally need the borrower to hold at least a 25% ownership stake in the business for the deposits to count.
3. Classify the business. This step decides which fixed ratio applies before anyone even considers a CPA letter.
4. Apply the fixed expense ratio or bring documentation. The default is a fixed percentage based on business type, or an accountant-provided ratio, or a profit-and-loss method capped at 80% of deposits.
5. Run the math. Average monthly eligible deposits times one minus the expense factor equals qualifying income before any other program adjustments.
6. Layer transfers in at full value. Money the borrower moves from their own business account into a personal account counts at 100%, since it’s already been through the business’s books once.
7. Feed the result into DTI. The qualifying income figure then runs through the same debt-to-income testing every closed-end mortgage uses to check repayment ability.
This isn’t a regulatory formula.
Which Ratio Applies to Your Business?
Most programs in Lendmire’s network default to one of a handful of fixed brackets, based on what kind of business is generating the deposits:
| Business Type | Typical Fixed Ratio |
|---|---|
| Service business, no employees | 20% |
| Service business, 1-5 employees | 40% |
| Business with 6+ employees, or any product-based business | 50% |
| Accountant-documented actual ratio | Varies by file |
| Profit-and-loss method | Capped at 80% of deposits |
A solo consultant, attorney, or financial advisor working alone often lands in the 20% bracket, which leaves 80 cents of every deposited dollar counting toward income. A retail shop or a business with a real payroll usually lands at 50%, cutting qualifying income in half. The gap between those two brackets, on the same deposit volume, is often the single biggest swing lever in the whole file — bigger than most credit-score tiers.
What Happens When You Use a CPA Letter Instead?
A CPA letter doesn’t automatically help you. It can raise or lower your qualifying income. Say a borrower runs a low-overhead business and their real costs are well under the default bracket. In that case, a signed letter from a CPA, enrolled agent, or qualified preparer can document the real ratio. This can meaningfully improve qualifying income. But high-overhead businesses are different. Think of a restaurant or a contractor — anything with heavy materials or payroll costs. For these, a documented letter can actually produce a worse number than the standard fixed ratio. That’s because real costs may run higher than the bracket assumes. This is a private-credit underwriting convention. It sits on top of the federal repayment-ability standard in Regulation Z. That rule requires lenders to make a reasonable, good-faith determination that a borrower can repay a loan. But it doesn’t dictate how a lender must calculate self-employed income on a non-QM file.
Underwriters check the letter closely, too. A real loan-file record from a non-QM securitization shows what happens when a CPA letter doesn’t state a specific numeric ratio: the file simply reverts to the standard expense factor. The letter has to actually name a percentage to change anything. That same file shows an accountant-documented 25% ratio improving qualifying income — but the loan still failed debt-to-income at the new number. This is a useful reminder: the expense factor is one input, not a guaranteed fix. This comes from SEC EDGAR filings tied to a non-QM loan pool. That same filing also confirms something else: owning 100% of the business doesn’t itself change which ratio applies. Classification and documentation drive the number, not ownership share.
For a deeper walkthrough of how this plays out on the largest files, Lendmire’s guide on how lenders set the statement length on a second home covers the 12-versus-24-month decision in more detail.
How the Expense Factor Changes Loan Size on a Second Home
Second-home leverage in Lendmire’s wholesale network steps down as the loan amount grows, and it runs roughly five points below the primary-residence ladder at every tier. On a second home priced between $300,000 and $1,000,000, purchase leverage typically runs to 85%, generally requiring a credit score around 700 or higher on most files. Between $1,000,000 and $1,500,000, purchase leverage typically runs to 80% with a 680 floor on most files, and that same 80% ceiling generally continues through the $2,000,000 to $2,500,000 band, though the credit floor rises to around 720. From $2,500,000 to $3,000,000, purchase leverage typically steps to 75% with a 720 floor. Above roughly $3,000,000 on a second home, super-jumbo overlays generally apply — a 700 credit floor, seasoning requirements on any credit event, and case-by-case underwriting on every figure above that line.
Because the expense factor decides your starting qualifying income, it effectively decides which rung of that ladder you can even reach. A borrower whose business classifies at 20% instead of 50% may show roughly double the qualifying income off the same deposit volume — often enough to move from a $1,000,000-and-under bracket into the next tier up, subject to full underwriting and the borrower’s overall credit and reserve profile.
Second Home vs. Investment Property: Why Occupancy Matters
A second home is not a rental property. And the expense-factor conversation only tells half the story if you’re picturing the property itself covering the payment. Second-home programs generally don’t let rental income from the subject property support the file. That’s because the occupancy category assumes the borrower — not a tenant — controls the home. This is a program-design boundary. It isn’t tied to the expense factor itself. It just means bank-statement income from the borrower’s outside business has to do all the qualifying work.
Compare that with an investment property purchase, where the loan can qualify primarily on the property’s own rental income covering the payment, subject to lender guidelines, rather than the borrower’s outside deposits. Investment-property leverage in the network runs on its own ladder — also topping out at 85% purchase in the $300,000 to $1,000,000 range, but with different cash-out and rate-term caps than a second home at the same price point. If a purchase is really being financed on the strength of a lease rather than the borrower’s business cash flow, it’s worth reviewing whether the file should be structured as a DSCR loan instead of a bank-statement second home. Lendmire’s complete DSCR loans guide walks through how that qualification path works.
Common Mistakes That Shrink Qualifying Income
A few patterns show up again and again on files that come in lower than they should:
- Submitting the wrong account. Running personal expenses through a business account, or vice versa, can trigger the wrong treatment. A real loan-file record shows an underwriter declining to apply an expense factor to a personal account only after confirming no business costs ran through it — the paperwork, not the account label, decided the outcome.
- Assuming a CPA letter always helps. As covered above, high-overhead trades can come out worse with a documented ratio than with the flat default.
- Missing the 25% ownership threshold. Business deposits generally need at least 25% ownership behind them to count at all.
- Treating deposits as static across 12 and 24 months. A longer statement window can smooth out a slow quarter or a seasonal dip — worth running both if your business has uneven monthly deposits.
- Forgetting reserves scale with loan size. Reserve requirements in the network typically run 3 months up to $500,000, 6 months up to $1,500,000, and 9 months above that, plus additional months for other financed properties — cash-out proceeds generally can’t be used to satisfy that requirement.
Anyone weighing a business-account bank-statement file against a personal-account one should look at Lendmire’s breakdown of how to use a bank statement loan before deciding which statements to submit.
This article is for general information only and isn’t legal or tax advice. Anyone structuring a second-home purchase or refinance around bank-statement income should talk with a qualified accountant or attorney about their own situation before making a decision.
Frequently Asked Questions
Does the expense factor apply if I submit personal bank statements instead of business ones? Generally no. Personal statement income is typically averaged directly without an expense deduction, on the assumption that personal deposits already reflect take-home money. If business activity is found running through a personal account, though, an underwriter can still apply a factor to it.
Can I choose which expense ratio bracket my business falls into?
Not exactly — classification is based on how the business actually operates, not how the borrower prefers to describe it. A business that sells products and performs services, for example, may need to document which activity drives most of its revenue before a ratio applies.
Is a CPA letter worth the cost if my business runs lean?
Often, yes, for a low-overhead service business where the fixed bracket assumes more expense than the business really carries. It’s typically worth less, and sometimes counterproductive, for businesses with heavier overhead than the standard bracket assumes.
Does a higher expense factor always sink the loan?
Not necessarily, but it lowers qualifying income, which can push debt-to-income closer to program limits or move the loan to a lower leverage tier on the second-home ladder. Reserves, credit profile, and overall file strength still factor into the final outcome.
Can rental income from the second home itself help offset a high expense factor?
Generally no. Second-home programs typically don’t allow income from the subject property to support qualification, since the occupancy category assumes the borrower uses the home rather than renting it out.
For current guidelines and terms, see Lendmire’s super jumbo bank statement loan programs page.
Self-employed borrowers can compare both super jumbo programs on Lendmire’s self-employed mortgages page.
About Lendmire
As a DSCR and non-QM mortgage broker, Lendmire — NMLS# 2371349 — connects investors with wholesale lending channels across 40 markets, including Washington, D.C. The property’s rental income, not the borrower’s tax returns, is central to lender review, which works for self-employed operators and portfolios beyond four financed properties. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. CFPB ATR/QM Rule (Regulation Z, 12 CFR §1026.43)
2. SEC EDGAR — VMC Asset Depositor ABS-15G
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.
