The Expense Factor on a Bank Statement Loan, Explained: Why 50%, and When It Can Be Lower

What is the expense factor on a bank statement loan?

The expense factor is the percentage of business-account deposits that a lender assumes goes to running the business, and therefore removes before counting the rest as your income. The standard factor on the Founder Loan is 50%.

A business account receives revenue. Before any of it becomes the owner's, it pays for payroll, rent, materials, software, insurance and every other cost. A tax return measures those costs line by line. A bank statement loan deliberately does not use the return, so it needs another way to allow for them. The expense factor is that allowance: one number, applied uniformly, so that a business's deposits can be read as income without a reconstruction of its books.

At Mbanc Private Client Lending, the Founder Loan reads 12 or 24 consecutive months of business statements for loan amounts from $1,000,000. This post explains the formula, why the standard sits at 50%, when a lower documented ratio can be used, what the factor does to how much you can borrow, and where it reads a business inaccurately. The full qualification sequence is in the pillar guide, how to qualify for a jumbo loan with bank statements.

How is the expense factor applied?

Qualifying monthly income equals average monthly qualifying business deposits, multiplied by your ownership percentage, multiplied by one minus the expense factor. At 50% and 100% ownership, that is half of average deposits.

The sequence matters. The factor is applied last, after the underwriter has cleaned the deposits: transfers between your own accounts are removed, loan proceeds are removed, one-off items are explained or removed, and the remainder is averaged over 12 or 24 months. Applying the factor to uncleaned deposits would let a transfer from your savings account count as half-income, which is why the cleaning comes first.

Ownership is the step between cleaning and the factor. Mbanc's guideline counts only your share of the business's deposits and requires that you own at least 25% of the business. A 50% partner in a firm with $200,000 of monthly deposits starts from $100,000, and at the standard factor qualifies on $50,000. A sole proprietor or single-member LLC is documented as a 100% owner. The exhibits in this post assume 100% ownership.

Each ten-point step adds the same dollar amount: 10% of deposits. Relative to the standard figure, a 40% ratio adds 20% to qualifying income and a 30% ratio adds 40%.

Why is the standard expense factor 50%?

Because a uniform, conservative allowance lets the underwriter assess any business from its deposits alone, without asking the owner to prove its margins, and still satisfy the duty to verify repayment ability.

Businesses differ enormously. A consulting practice may keep most of what it bills; a distributor may keep a few cents of each dollar. A single standard factor cannot be right for both. What it can be is predictable. The owner knows before applying what the deposits will produce, the underwriter does not need to audit a profit and loss statement, and the result is a figure the federal Ability-to-Repay rule (Regulation Z, 12 CFR 1026.43) can rest on, because it is drawn from verified third-party records: the bank's statements.

The 50% standard is a convention, not a measurement of your business. For many owner-led service firms it understates income. For some product and pass-through businesses it overstates it. The next two sections deal with each case.

When can a lower expense ratio be used?

Mbanc's guideline accepts two alternatives to the 50% standard: an expense ratio stated in writing by a CPA, enrolled agent or tax preparer, with a floor of 10%, or the net income shown on a profit and loss statement prepared by one of those third parties and supported by the bank statements. Both are available on the Founder Loan; which one fits your file is a question of what your preparer is willing to sign.

This is where high-margin businesses recover the income a standard factor leaves on the table. A professional practice, an advisory firm or a software business with lean overhead may genuinely spend 25 or 35 cents of each dollar. Applying 50% to that business undercounts the owner by a wide margin.

A documented ratio is credible when it is consistent with what the bank statements already show. The underwriter will see the outflows from the same account: payroll runs, rent, vendor payments. A ratio that says 30% while the statements show most deposits leaving again each month to suppliers will be questioned. A ratio that matches the visible pattern reads cleanly.

Your tax preparer decides what they are willing to prepare and sign; the desk does not ask a CPA to vouch for a loan, and Mbanc does not give tax advice. Advisors who want to understand the documentation from their side should read for CPAs: how your clients qualify without their tax returns.

How much more can you borrow with a lower expense ratio?

A lower ratio raises qualifying income, and under the 50% debt-to-income maximum each additional dollar of monthly income supports 50 cents of additional monthly debt payments. Converting that payment room into a loan amount requires terms quoted for a specific file.

The other limits do not move. LTV ceilings, the $3,000,000 standard maximum loan amount (up to $4,000,000 on a primary purchase at 720+), and reserves (3 to 12 months of PITIA depending on LTV and loan size: 9 months on loans over $1,500,000, 12 months over $2,500,000) apply the same way. If the loan is interest-only, DTI is tested on the fully amortizing payment, and on a primary residence the guideline allows DTI to 55% with a lower LTV, $3,500 of monthly residual income and 6 months of reserves. Pricing is never published here, and more full calculations are in the bank statement guide's worked examples.

What if your real expenses are higher than 50%?

Then the standard factor overstates your income, and the underwriter, who can see the outflows on the same statements, is likely to notice. The honest move is to plan on the number your business actually produces.

Thin-margin businesses are the clearest case: distribution, general contracting with large subcontractor pass-throughs, retail and e-commerce with heavy product and advertising costs. A business that deposits $500,000 each month and spends $450,000 of it does not produce $250,000 of monthly owner income, and a file built on that figure is a file that slows down or fails later. The Ability-to-Repay rule requires the lender to make a reasonable, good-faith determination, so a factor that visibly contradicts the statements is not a shortcut.

For these owners, personal statements are often the more accurate route, because the draws the business can actually afford are what reach the owner's account. The comparison is laid out in personal vs. business bank statements for a jumbo loan.

How does the expense factor compare with other programs' income formulas?

Each of the four Private Client Lending programs converts a different document into qualifying income with its own fixed formula. The expense factor is the Founder Loan's version of that conversion.

The comparison explains a common routing decision. A consultant who invoices through a business account but receives 1099s from each client may qualify on 90% of those receipts under the Operator Loan instead of 50% of deposits under the Founder Loan; some investor guidelines accept 1099s issued to the consultant's 100%-owned LLC when a CPA, EA or tax preparer letter shows expenses of 10% or less. See how 1099 income is calculated for a jumbo loan, and for the asset route, the asset depletion formula and why lenders divide by 84.

Does the expense factor apply to personal bank statements?

No. Personal-account deposits count in full, because the business's expenses were paid before the money reached you.

The only adjustments on personal statements are the same exclusions every file gets: transfers between your own accounts, loan proceeds and unexplained one-off items come out. Everything else that is recurring, earned income counts dollar for dollar. That is why the expense factor is, in practice, the fulcrum of the personal-versus-business decision: at 50%, personal statements win whenever your draws exceed half of the business's deposits.

Who should not rely on the expense factor?

Owners whose margins are far thinner than 50%, owners whose tax returns already show enough income, and owners whose income is better measured by 1099s or assets.

The first group should plan on personal statements or a documented higher-cost reality, for the reasons above. The second should consider a conventional jumbo, which is usually simpler when the return already works; see non-QM jumbo vs. conventional jumbo. The third should compare programs before choosing one.

Mortgage Bank of California Inc. dba Mbanc underwrites and funds in-house, which means the expense treatment is decided by the people who approve the loan, not estimated by an intermediary. Mayer Dallal reads every inquiry and will tell you on a 15-minute call, with no application and no credit pull, which factor your file would use. Program details for Mbanc Private Client Lending's Founder Loan are on the bank statement jumbo page.