How Expense Factor Rules Work for a Sole Proprietor on Business Bank Statements

The Quick Read: A sole proprietor on business bank statements qualifies when the lender averages eligible business deposits over the statement window, subtracts a lender-set expense factor to stand in for operating costs, and treats what remains as monthly qualifying income, which means the factor, not the deposit total, usually decides how much the borrower can borrow. The file is reviewed on documented income under the applicable program, subject to lender guidelines.

• The lender sets the factor, not the borrower. Business type, overhead, and documentation drive it.
• Personal-account statements usually skip the factor, but a commingled account can pull it back in.
• A sole proprietor has no ownership-percentage step, which makes the math simpler than for an LLC with partners.
• A rental purchase usually runs on DSCR instead, so the factor matters most on owner-occupied files.

What Is an Expense Factor?

An expense factor is a percentage haircut that a lender applies to business-account deposits to estimate net income. Deposits into a business account are gross revenue. They include money that goes straight back out to suppliers, software, fuel, and subcontractors. The factor stands in for those costs so the lender is not counting revenue as take-home pay.

The formula is short. Eligible deposits, divided by the number of months, multiplied by one minus the factor, gives monthly qualifying income. Everything else here is about what goes into each piece of that formula.

Bank statement lending exists because a tax return and a bank statement tell different stories about the same business. Schedule C income reflects deductions, depreciation, and write-offs that shrink taxable profit. Deposits show what the business actually collects. Scotsman Guide describes bank-statement loans as a way for self-employed borrowers to qualify on actual income rather than the tax-return figure, and notes that the process takes judgment, such as examining several accounts for one business.

How Does Underwriting Treat the Statements, Step by Step?

Underwriting follows the same sequence on most programs across the wholesale network Lendmire works with. The details vary by lender, but the order rarely does.

1. Pick the statement window. Programs typically use 12 months of business or personal statements. Some lenders offer a longer window, which changes the average for seasonal earners.

2. Choose the account type. Personal statements typically get no expense factor. Business statements do.

3. Strip out non-income credits. Transfers between your own accounts, loan proceeds, refunds, and one-time windfalls come out.

4. Average what remains over the number of months in the window.

5. Apply the expense factor to that average. The result is monthly qualifying income.

6. Test the result against debt-to-income. On an owner-occupied file, qualifying income feeds the DTI calculation and sets the loan size.

7. Review the supporting documents. An accountant-prepared expense letter, a third-party profit-and-loss statement, proof of business tenure, and letters explaining unusual deposits can all change the outcome where the program accepts them.

A sole proprietor skips one step that partnerships and multi-member LLCs face: the ownership-percentage adjustment. If you own all of the business, there is nothing to prorate. Always confirm that against the specific program, though, because a sole proprietor who shares revenue with a spouse or partner informally may be asked about it.

Business Statements or Personal Statements?

The choice usually comes down to where your business income lands and how cleanly you separate it from household spending.

The sole proprietor catch is that the entity gives no built-in separation. Many sole proprietors deposit client payments into a personal checking account. Lenders generally allow that, and the factor often does not apply, but the underwriter may ask where business expenses are paid from. If business costs run through the same account as groceries and car payments, the underwriter may reclassify it as a business account and apply the factor anyway.

The practical rule is this. If your business expenses are paid from a separate account, personal-statement treatment is easier to defend. If everything runs through one account, expect questions and expect the factor.

Which Deposits Count Toward Income?

Only deposits that look like recurring business revenue count. Underwriters screen every credit on the statement, and the screening is where many sole proprietors lose income they thought they had.

Large or odd deposits need a letter of explanation. A deposit you cannot explain is usually treated as non-qualifying, which lowers the average before any factor is applied. Cleaning up the statements before submission, with labeled transfers and short explanations for big credits, protects the number.

Who Sets the Factor, and What Moves It?

The lender or program sets the factor. It is not a federal rule, and it is not negotiable in the ordinary sense. The CFPB’s small-entity compliance guide says a creditor must verify income using reasonably reliable third-party records and lists bank statements as acceptable records. It prescribes no haircut percentage. That gap is why programs differ, and why no single number is the answer.

Across the lenders in the network, a few inputs usually decide the factor:

• Business type. Low-overhead service work tends to carry a lighter factor than businesses with heavy materials, inventory, or staffing costs.
• Employees and subcontractors. More payroll usually means a higher factor.
• Documentation. A third-party expense ratio or P&L can support a different factor where the program allows it.
• Program design. Some programs apply a fixed ratio. Others give a default that documentation can move.

No program is universal. A factor that one lender applies by default may be adjustable at another, and a few lenders accept an accountant-prepared ratio while others do not. Lendmire, a mortgage broker, compares those guidelines against a borrower’s actual file instead of assuming one formula. For a deeper look at how documentation can shift the number on a labor-heavy business, see Lendmire’s piece How to Win a Lower Expense Factor on a Service-Business Bank Statement Loan.

A Worked Example: The Same Sole Proprietor Three Ways

These figures are modeled assumptions for illustration only, not program terms. To avoid dollar amounts, set the borrower’s average eligible monthly deposits at an index of 100.

The same deposits produce qualifying income that ranges from half the deposit average to all of it. That swing flows straight into DTI and loan size. A documented factor of 30% instead of a modeled default of 50% lifts qualifying income by 40% in this example.

Two cautions keep the example honest. First, the personal-account row assumes the lender accepts the account as personal, which depends on how clean the statements are. Second, a lower factor only counts when the program accepts the supporting document. A claimed ratio without proof falls back to the default.

Where the General Rule Breaks

The standard treatment has named exceptions. Most of them trip up sole proprietors specifically.

Commingled accounts. Personal spending in a business account, or business income in a personal account, can change how the underwriter classifies the account. The classification decides whether a factor applies.

Unsupported claims. If you say your costs are 25% but your statements and documents do not show it, the lender uses its own factor. A CPA letter helps only when the numbers behind it hold up.

Multiple accounts or locations. Scotsman Guide notes that a business with more than one account or location needs every account reviewed. Some programs allow multiple accounts. Leaving one out can understate income, and including one with heavy transfers can overstate it.

Seasonal or lumpy deposits. A longer statement window smooths a seasonal business but can also dilute a recent growth year. Which window helps depends on the shape of your income, and lender options differ.

Cash-out files. On an owner-occupied cash-out (primary residence or second home), the program uses a fixed expense ratio, up to 80% LTV, with 75% where an accountant-prepared ratio is used, by loan size and credit. That is the cash-out ceiling, not the purchase ceiling. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.

Schedule C versus deposits. The same business can look weak on a tax return and strong on statements. The factor is what reconciles the two views, and a profitable-on-paper business with large write-offs is often the best fit for this documentation type.

How the Federal Framework Fits In

A short legal note belongs here because the “50% rule” is often mistaken for law. It is not. The ability-to-repay rule, published in the Federal Register, lists self-employment income as income a creditor may consider and requires verification with reliable records. It sets standards for verification, not an expense percentage. So the factor is a lender and investor guideline choice, which is why it varies.

Occupancy decides which disclosure regime applies. An owner-occupied bank-statement loan, whether a primary residence or second home, is a consumer mortgage, so 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. Keep those two straight when you plan a file.

Does This Matter for a Rental Purchase?

Usually less than you would expect. DSCR loans are designed for non-owner-occupied investment properties, and they qualify primarily on property-level rental income covering the payment, subject to lender guidelines. Your deposits and expense factor do not drive that calculation. Read Lendmire’s complete DSCR loans guide for how that approach works.

The expense factor matters when you use bank-statement income on an owner-occupied file. A self-employed investor buying a primary residence can typically reach up to 90% LTV on a purchase or rate-term refinance through select lenders, with stronger files earning the top of that range. Loan sizes generally run from $125,000 to $3,500,000, and reserves commonly sit around six months of the housing payment. An investment-property cash-out on this documentation tops out around 75% LTV. Investment purchase leverage on bank-statement documentation varies by lender, so investor leverage questions usually belong on the DSCR side.

If you do not want to rely on deposits, a program that qualifies from liquid assets can reach about 80% LTV on a primary residence. Each of these is a typical range, and every file is reviewed individually. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.

Documents to Gather Before You Apply

• Twelve months of statements for every account you want counted.
• A letter of explanation for each large or unusual deposit.
• Proof of business ownership and how long you have operated.
• An accountant-prepared expense letter or third-party P&L, if the program accepts one.
• A short note showing where business expenses are paid from.

An expense letter works best when it states the actual cost ratio, the basis for it, and the preparer’s credentials. Run your own check first. Add up a year of business costs, divide by deposits, and compare the result with the lender’s default. If your real ratio is far lower, documentation is worth the effort. If it is close, it may not move the file.

Tax treatment varies; consult a qualified professional.

Key Terms Defined

Expense factor: The percentage a lender subtracts from business deposits to estimate net income.

Eligible deposits: Credits that represent recurring business revenue after transfers, loans, refunds, and one-time items are removed.

Statement period: The number of months of statements the lender averages, typically 12.

Qualifying income: The monthly figure left after the factor, used to test DTI and loan size.

Commingling: Mixing personal and business transactions in one account.

Reach the team at 828-256-2183 or request a quote. Programs are subject to lender guidelines and this is not a commitment to lend.

For current guidelines and terms, see Lendmire’s bank statement loan programs page.

About Lendmire

A non-QM mortgage broker (NMLS# 2371349), Lendmire arranges DSCR financing for real estate investors in 41 markets — 40 states plus Washington, D.C. Because deals are underwritten primarily on property cash flow rather than personal income documentation, the structure suits self-employed buyers and entity-owned portfolios. Lendmire places loans through wholesale investor lenders; it is not a direct lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Scotsman Guide, “Don’t Shut the Door on Quality Borrowers”

2. CFPB ATR/QM Small Entity Compliance Guide

3. Federal Register, Ability-to-Repay and Qualified Mortgage Standards