Maximizing Qualifying Income for Bank Statement Borrowers
The expense ratio applied to a bank statement loan can swing qualifying income by 20-40%, making expense ratio optimization one of the most powerful levers brokers have for getting self-employed borrowers approved at higher loan amounts. A borrower with $50,000 in monthly deposits qualifies for $25,000 monthly income at a 50% expense ratio—but that same borrower qualifies for $32,500 at a 35% ratio. That $7,500 monthly difference translates to roughly $150,000 in additional borrowing capacity.
This guide provides a deep dive into expense ratio mechanics, optimization strategies, documentation techniques, and real-world tactics for maximizing qualifying income on every bank statement file.
Understanding Expense Ratio Mechanics
The expense ratio is the percentage of gross deposits that lenders assume represents business expenses rather than income available for mortgage payments. When a lender applies a 50% expense ratio to $40,000 in monthly deposits, they’re assuming $20,000 goes to business costs and only $20,000 represents actual qualifying income.
The Fundamental Formula
Qualifying Monthly Income = Average Monthly Deposits × (1 – Expense Ratio)
The expense ratio functions as a discount factor. Higher ratios mean more aggressive discounting of gross deposits; lower ratios preserve more deposits as qualifying income. A 10-percentage-point reduction in expense ratio—say, from 55% to 45%—increases qualifying income by approximately 22% on the same deposit base.
Why Expense Ratios Exist
Lenders apply expense ratios because bank deposits represent gross business revenue, not net income. A plumber who deposits $60,000 this month didn’t earn $60,000 in take-home pay—they paid for materials, subcontractors, insurance, vehicle costs, and dozens of other business expenses from that revenue. The expense ratio attempts to estimate what portion of those deposits actually represents income available for personal expenses like mortgage payments.
The challenge is that expense ratios are inherently imprecise. A management consultant and a restaurant owner might both deposit $50,000 monthly, but their actual expense structures are vastly different. The consultant might have 25% actual expenses while the restaurant owner has 75%. Applying the same ratio to both borrowers would significantly overstate one’s income while understating the other’s.
This imprecision creates both risk and opportunity. The risk is that standard ratios may not reflect reality for a given borrower. The opportunity is that borrowers with lower-than-average expenses can document their actual costs and qualify for higher income.
Expense Ratio Calculator
Compare standard vs. optimized qualifying income
| Scenario | Expense Ratio | Monthly Income | Annual Income | vs. Standard |
|---|
Expense ratios subject to lender guidelines and underwriting approval. CPA letter requirements vary by lender. Contact your AE for program-specific details.
Standard Expense Ratios by Program Type
Personal Bank Statement Ratios
Personal bank statement programs typically apply a fixed 50% expense ratio regardless of business type. The logic is that personal account deposits have already been filtered through the business—the borrower has presumably paid major business expenses before transferring funds to personal accounts. The 50% ratio accounts for taxes, remaining business costs paid from personal funds, and provides a conservative cushion.
Some lenders offer tiered personal statement ratios based on profession. Medical professionals, attorneys, and CPAs may qualify for 40% ratios based on the assumption that these professions typically have lower overhead. However, these profession-based reductions are not universal—always verify with the specific lender.
Business Bank Statement Ratios by Industry
Business bank statement programs use variable expense ratios tied to industry classification because business accounts show gross revenue before any expense allocation. The ratios attempt to reflect typical cost structures for different business types.
|
Industry |
Standard |
With CPA |
Typical Businesses |
|
Professional Services |
45% |
35% |
Attorneys, CPAs, consultants, financial advisors |
|
Service-Based |
50% |
40% |
Marketing agencies, IT services, cleaning companies |
|
Skilled Trades |
55% |
45% |
Plumbers, electricians, HVAC, general contractors |
|
Medical/Healthcare |
50% |
40% |
Physicians, dentists, chiropractors, therapists |
|
Retail/E-Commerce |
65% |
55% |
Amazon sellers, retail stores, wholesalers |
|
Restaurant/Food |
70% |
60% |
Restaurants, catering, food trucks |
These ratios represent starting points, not final determinations. The key insight is that every ratio in the “With CPA” column represents potential income gain for borrowers who can document actual expenses below the standard ratio.
The CPA Letter Strategy
A CPA letter documenting actual business expenses is the single most effective tool for reducing applied expense ratios. When a borrower’s CPA certifies that actual expenses are 38% of revenue rather than the standard 50%, lenders can apply the lower ratio—increasing qualifying income by 24%.
What a CPA Letter Must Include
For maximum effectiveness, a CPA letter should contain specific elements that give underwriters confidence in the stated expense ratio. The letter should be on the CPA’s professional letterhead and include their license number and contact information. It must identify the borrower and their business by legal name and entity type. The letter should state the time period analyzed, which should match the bank statement period being used for qualification. It needs to provide the calculated expense ratio as a percentage of gross revenue and briefly describe the methodology used to calculate expenses.
Sample CPA Letter Language
“I have reviewed the financial records of [Business Name], owned by [Borrower Name], for the 24-month period ending [Date]. Based on my analysis of business bank statements, accounting records, and tax returns, I certify that average monthly business expenses, including cost of goods sold, operating expenses, and owner’s draws for business purposes, represent approximately 42% of gross monthly deposits during this period. This analysis excludes owner’s personal draws and distributions, which are not business expenses. I prepared the 2024 and 2025 tax returns for this business and am familiar with its financial operations.”
When CPA Letters Work Best
CPA letters provide the greatest benefit for borrowers whose actual expenses fall significantly below industry standard ratios. The ideal CPA letter candidate operates a low-overhead business model, such as consulting, professional services, or digital businesses. They have clean financial records that clearly distinguish business expenses from owner compensation. They maintain an existing relationship with a CPA who knows their business, and their actual expense ratio is at least 10 percentage points below the standard industry ratio.
Cost-Benefit Analysis
Engaging a CPA to prepare an expense verification letter typically costs $300-800 depending on complexity and the CPA’s existing familiarity with the business. For borrowers with significant deposit volumes and genuinely low expenses, this investment can increase qualifying income by $5,000-15,000 monthly—easily justifying the cost.
Calculate the potential benefit before recommending a CPA letter. If a borrower has $40,000 monthly deposits and could potentially reduce their expense ratio from 55% to 40%, the income gain would be $40,000 × 0.15 = $6,000 monthly. That $6,000 monthly income increase supports approximately $120,000 in additional loan amount at typical DTI ratios.
Business Classification Optimization
How a business is classified for expense ratio purposes can significantly impact qualifying income. Many businesses span multiple categories, and the classification choice isn’t always obvious.
Dual-Nature Businesses
Consider a business that provides both products and services. A computer repair shop sells hardware (retail) and provides repair services (service-based). If 60% of revenue comes from services and 40% from product sales, should it be classified as retail (65% expense ratio) or service-based (50% expense ratio)? The answer depends on how the business is presented and documented. If bank statements, business licenses, and CPA letters all emphasize the service component, the lower service-based ratio may apply.
Professional Service Carve-Outs
Professional services typically receive the most favorable expense ratios because these businesses genuinely have low overhead. However, the definition of “professional services” varies by lender. Some restrict this category to licensed professionals like attorneys, CPAs, and physicians. Others include management consultants, financial advisors, and executive coaches. When a borrower’s profession falls into a gray area, proactive documentation helps.
Real-World Optimization Scenarios
Scenario 1: IT Consultant Maximizing Professional Services Rate
Marcus operates an IT consulting practice as a sole proprietor. His business bank account shows average monthly deposits of $32,000 over the past 24 months. His actual expenses are minimal—home office, software subscriptions, and professional development totaling about $3,500 monthly (11% of deposits). Without optimization, Marcus would be classified as a general service business with a 50% expense ratio, yielding $16,000 monthly qualifying income.
Optimization strategy: Marcus obtains a CPA letter documenting his 11% actual expense ratio and emphasizing the advisory nature of his practice. With proper classification and CPA documentation, he qualifies for a 35% expense ratio, yielding $20,800 monthly qualifying income—a 30% increase.
Scenario 2: Contractor Reducing Industry-Standard Ratio
Jennifer owns a residential painting company structured as an LLC. Her business deposits average $65,000 monthly. As a contractor, she faces a standard 55% expense ratio. However, Jennifer runs a lean operation—she employs only one helper, buys materials on account with 60-day terms, and subcontracts large jobs. Her actual expenses run about 42% of revenue.
Optimization strategy: Jennifer’s CPA prepares a detailed expense analysis showing her 42% actual ratio. With documentation, her expense ratio drops to 42%, increasing monthly qualifying income from $29,250 to $37,700—an $8,450 monthly gain.
Scenario 3: E-Commerce Seller Using P&L Approach
David runs an Amazon FBA business selling kitchen products. His business account shows $95,000 monthly deposits, but as an e-commerce seller, he faces a 65% standard expense ratio. Using the standard bank statement approach: $95,000 × 0.35 = $33,250 monthly qualifying income.
Optimization strategy: David’s accountant prepares a detailed P&L statement showing $95,000 average monthly revenue and $55,100 average monthly expenses (58%), resulting in $39,900 monthly net income. Using the P&L program instead of standard bank statement qualification increases his qualifying income by $6,650 monthly.
Common Optimization Mistakes
Mistake 1: Assuming Lower is Always Better
Not every borrower benefits from expense ratio reduction. If actual expenses exceed the standard ratio, pushing for a lower ratio based on business classification alone can backfire when underwriters review the documentation. Always calculate actual expenses before pursuing optimization strategies.
Mistake 2: Inadequate Documentation
Requesting a reduced expense ratio without proper documentation wastes time and can result in worse outcomes than accepting the standard ratio. A CPA letter that’s vague about methodology or doesn’t cover the full statement period may be rejected, leaving the borrower with the standard ratio plus underwriter skepticism.
Mistake 3: Ignoring Program Selection
Sometimes the best optimization is choosing a different program entirely. A borrower who qualifies for both DSCR and bank statement programs might find that DSCR produces better results if the subject property has strong rental income. Evaluate all available programs before focusing on optimizing any single approach.
Frequently Asked Questions
What’s the lowest expense ratio typically available?
Most lenders won’t go below 30% even with extensive documentation. The rationale is that every business has some irreducible costs—taxes, insurance, basic overhead.
Can expense ratios be negotiated with lenders?
Standard ratios are policy-driven and typically aren’t negotiable. However, the decision to accept CPA documentation for a reduced ratio often involves underwriter discretion. Strong documentation increases the likelihood of approval at lower ratios.
How long does a CPA need to prepare an expense verification letter?
For CPAs already familiar with the borrower’s business, 3-5 business days is typical. If the CPA needs to review records they haven’t seen before, allow 1-2 weeks.
Do all lenders accept CPA letters for expense ratio reduction?
Most Non-QM lenders accept CPA documentation, but policies vary. Some have maximum reduction limits. Others require specific CPA letter formats. Always verify lender policy before pursuing this strategy.
Partner with AHL for Bank Statement Programs
American Heritage Lending offers flexible bank statement programs with competitive expense ratios and CPA letter options. Our underwriters understand self-employed income and work with brokers to optimize qualification for each borrower’s unique situation.
Contact your Account Executive at (855) 340-9892 to discuss expense ratio optimization strategies, or become a partner at ahlendtpo.com to access our full Non-QM product suite.