Bank statement loans offer two distinct qualification paths—personal statements and business statements—each with unique advantages depending on your borrower’s business structure, income flow, and documentation availability. Choosing the right path can mean the difference between a declined application and a smooth approval with maximized qualifying income. For mortgage brokers serving self-employed clients, understanding when to recommend each program type is essential knowledge that directly impacts deal success rates and borrower satisfaction.
The distinction between these two program types goes far beyond simple documentation preferences. Each path applies different expense ratio calculations, has unique documentation requirements, and serves different borrower profiles. A borrower who qualifies easily under one program might struggle under the other—or worse, might receive significantly less qualifying income than they could have achieved with the optimal program selection.
This comprehensive guide breaks down both program types in detail, compares expense ratio calculations across industry types, and provides a systematic framework for selecting the optimal approach for each self-employed borrower. By the end, you’ll have the knowledge to confidently recommend the right bank statement program for any scenario.
Understanding the Two Bank Statement Paths
Bank statement programs revolutionized mortgage lending for self-employed borrowers by analyzing actual deposit history to calculate qualifying income without relying on tax returns. This approach recognizes a fundamental truth about self-employment: tax returns often dramatically understate a business owner’s actual income due to legitimate deductions, depreciation, and tax optimization strategies.
However, the source of those statements—personal accounts versus business accounts—fundamentally changes how income is calculated and what documentation is required. Understanding these differences is critical for brokers who want to maximize their clients’ qualifying income while ensuring smooth underwriting.
Personal Bank Statement Programs
Personal bank statement programs analyze deposits into the borrower’s personal checking or savings accounts over a 12 or 24-month period. This approach works best for self-employed individuals who receive income directly into personal accounts without routing through a separate business entity. The typical personal bank statement borrower includes freelancers and consultants who invoice clients directly, independent contractors receiving 1099 payments to personal accounts, gig economy workers such as rideshare drivers and delivery personnel, sole proprietors who don’t maintain separate business banking, and professionals like real estate agents who deposit commissions personally.
The key advantage of personal statement programs lies in their simplicity. Income flows directly to the borrower without the complexity of business accounting, payroll structures, or owner distributions. When a freelance graphic designer receives a $5,000 payment from a client, that deposit appears directly in their personal account—there’s no business entity to trace through, no questions about how much the owner actually takes home, and no complicated analysis of business expenses versus owner compensation.
To account for business expenses that self-employed individuals pay from personal funds, lenders apply a standardized expense ratio—typically 50%. This means lenders assume half of the deposits represent business costs (software subscriptions, supplies, professional development, etc.) and the remaining half represents actual income available for mortgage payments.
Personal Statement Qualifying Formula
Qualifying Income = Average Monthly Deposits × (1 – Expense Ratio)
Consider a freelance marketing consultant who deposits an average of $30,000 per month into their personal checking account. Using the standard 50% expense ratio, the calculation is straightforward: $30,000 multiplied by 0.50 equals $15,000 in monthly qualifying income. This $15,000 figure is what underwriters use to calculate debt-to-income ratios and determine maximum loan amounts.
The beauty of this approach is its predictability. Brokers can quickly estimate qualifying income by simply halving the average monthly deposits. There’s no need to analyze business financials, interpret P&L statements, or debate appropriate expense ratios for different industries.
Business Bank Statement Programs
Business bank statement programs take a fundamentally different approach by analyzing deposits into the borrower’s dedicated business checking accounts. This method captures total business revenue before any expenses, owner draws, or payroll distributions are made. The program then applies an expense ratio that reflects actual business operating costs based on industry type.
Business statement programs work best for borrowers who have established formal business entities and maintain clear separation between business and personal finances. The ideal business statement candidate includes LLC members who run all revenue through business accounts, S-Corp shareholders who take a combination of salary and distributions, C-Corp owners with formal payroll structures, partnership members with dedicated business banking, and established small business owners with multiple years of consistent revenue.
The primary advantage of business statements is their ability to capture the full scope of business revenue. Consider an S-Corp owner who runs a successful plumbing company. The business generates $50,000 per month in revenue, but the owner only takes $6,000 monthly salary plus occasional distributions. Using personal statements, the lender would only see the $6,000 salary deposits. Using business statements, the lender sees the full $50,000 in business revenue and can calculate qualifying income from that larger base.
Business Statement Qualifying Formula
Qualifying Income = Average Monthly Business Deposits × (1 – Expense Ratio)
For a contracting business averaging $60,000 in monthly deposits with an industry-appropriate 55% expense ratio, the calculation yields: $60,000 multiplied by 0.45 equals $27,000 in monthly qualifying income. Even though the expense ratio is higher than the standard personal statement ratio, the much larger deposit base often produces significantly higher qualifying income.
Expense Ratio: The Critical Variable
The expense ratio is arguably the single most important factor in bank statement qualification. This percentage represents assumed business expenses that are subtracted from gross deposits to arrive at net income available for mortgage payments. A difference of just 10 percentage points in expense ratio can mean tens of thousands of dollars in annual qualifying income—often the difference between approval and denial, or between a conforming loan amount and a jumbo.
Understanding how expense ratios work and how they differ between program types is essential knowledge for any broker working with self-employed clients.
Personal Statement Expense Ratios
Personal bank statement programs typically use a fixed expense ratio, with 50% being the industry standard. This standardized approach simplifies underwriting considerably since personal account deposits already exclude many business expenses that would have been paid from business accounts. The logic is straightforward: if a freelancer deposits $10,000 this month, they’ve probably already paid their business expenses from other funds, so a 50% reduction accounts for taxes and any remaining business costs.
Some lenders offer reduced expense ratios for certain circumstances. Borrowers in low-expense professions such as consulting or professional services may qualify for ratios as low as 40%. Additionally, borrowers who can provide a CPA letter documenting their actual expense percentage may receive a reduced ratio that reflects their real business costs. This can be particularly valuable for professionals with minimal overhead.
Personal Statement Expense Ratio Range: 40% – 50%
Business Statement Expense Ratios by Industry
Business statement programs use variable expense ratios that reflect the actual cost structure of different industries. Since business accounts show gross revenue including all expenses that will eventually be paid out, higher expense ratios are typically applied compared to personal statements. The specific ratio depends on the type of business and its typical cost structure.
|
Business Type |
Typical Expense Ratio |
Rationale |
|
Professional Services |
35% – 45% |
Attorneys, CPAs, consultants with minimal overhead and no inventory requirements |
|
Service-Based Business |
45% – 55% |
Cleaning services, landscaping, personal training with labor costs and some materials |
|
Contractor / Trades |
50% – 60% |
HVAC, plumbing, electrical with materials, subcontractors, and equipment costs |
|
Retail / E-Commerce |
60% – 70% |
Amazon sellers, retail stores with high cost of goods sold and inventory carrying costs |
The CPA Letter Advantage
A CPA letter documenting actual business expenses can reduce the applied expense ratio by approximately 10 percentage points—a change that can dramatically increase qualifying income for the right borrowers. This option is particularly valuable for high-revenue businesses with well-controlled expenses, where the standard industry ratio overstates actual costs.
Consider the impact on a professional services firm with $80,000 in monthly business deposits. Without a CPA letter, the lender applies the standard 55% expense ratio for service businesses, resulting in $80,000 multiplied by 0.45, which equals $36,000 in monthly qualifying income. However, if the borrower’s CPA can document that actual expenses are only 45% of revenue, the calculation becomes $80,000 multiplied by 0.55, yielding $44,000 in monthly qualifying income. That represents an additional $8,000 per month—or $96,000 annually—in qualifying income from a single piece of documentation.
The key is that the CPA letter must document actual, verifiable expenses. This isn’t about creative accounting; it’s about accurately representing businesses that genuinely operate with lower overhead than industry averages. Many borrowers already work with CPAs for tax preparation and business planning, making this documentation relatively easy to obtain.
Bank Statement Income Calculator
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| Scenario | Ratio | Monthly | Annual |
|---|
Bank statement programs require 2+ years self-employment. Expense ratios subject to underwriting review. CPA letter may reduce applied expense ratio.
Decision Framework: Choosing the Right Program
Selecting between personal and business bank statements requires analyzing multiple factors beyond just the raw income calculation. The optimal choice depends on business structure, income flow patterns, expense profiles, and documentation availability. Here’s a systematic approach to making the right recommendation for each borrower.
Factor 1: Business Structure
The borrower’s business structure provides the first indicator of which program is likely to work best. Sole proprietors, freelancers, independent contractors, gig economy workers, and professionals receiving 1099 income directly to personal accounts are typically better suited for personal bank statement programs. These borrowers often don’t have formal business entities and may not maintain separate business banking, making personal statements the only viable option.
Conversely, LLC members with established business accounts, S-Corp shareholders who take a combination of salary and distributions, C-Corp owners with formal payroll structures, and partnerships with dedicated business banking are typically better candidates for business bank statement programs. These structures create a natural separation between business revenue and personal income that business statement programs are designed to analyze.
Factor 2: Income Flow Pattern
Understanding where income actually deposits is crucial for determining the strongest documentation source. Trace the money from client payment to the borrower’s pocket. If clients pay directly to personal accounts, if 1099 income goes to personal banking, or if the owner takes regular draws that represent most of the business profit, personal statements are likely the better choice because they capture the income directly without the complexity of business accounting.
Business statements become the better option when all revenue flows through business accounts first, when the owner takes irregular distributions that don’t reflect true earning capacity, when significant business revenue remains in the business account for reinvestment or growth, or when personal accounts show only modest owner draws that understate actual business success.
Factor 3: Expense Profile Analysis
The borrower’s actual expense ratio is perhaps the most important factor in determining which program produces higher qualifying income. This requires honest assessment of real business costs, not just selecting whichever ratio sounds more favorable.
Personal statements tend to produce higher qualifying income when actual business expenses exceed 50% of revenue. This includes high cost-of-goods-sold businesses like retail and manufacturing, operations with heavy subcontractor or labor costs, and situations where the borrower cannot obtain a CPA letter to reduce the business statement expense ratio. In these cases, the fixed 50% personal ratio is actually more favorable than the higher industry-specific business ratio.
Business statements produce higher qualifying income when actual expenses fall below 50%, which is common in low-overhead service businesses, professional practices with minimal operating costs, and any situation where a CPA letter can document expenses significantly below industry averages. The ability to capture higher gross revenue while applying a lower verified expense ratio creates a powerful combination.
Factor 4: Documentation Availability
Both programs require 12 or 24 months of statements plus verification of at least two years of self-employment. However, business statement programs typically require additional documentation including business licenses, articles of organization or incorporation, operating agreements, and sometimes P&L statements. Consider which statements are easier to obtain, present a cleaner picture of income, and require less explanation to underwriters.
Real-World Comparison Scenarios
The following scenarios illustrate how to apply this decision framework in practice. Each example analyzes a different borrower profile and demonstrates the income calculation under both program options.
Scenario 1: Freelance Graphic Designer
Sarah is a sole proprietor who designs marketing materials for small businesses. She operates without a formal business entity, invoices clients directly, and deposits all payments into her personal checking account. Her expenses are minimal—primarily software subscriptions, a home office, and occasional stock photo purchases.
Financial Profile:
Personal Account Average Deposits: $12,000/month
Business Account: Does not maintain one
Actual Expense Ratio: Approximately 30%
Since Sarah doesn’t have a business account, personal statements are her only option. Using the standard 50% expense ratio, her qualifying income calculates to $12,000 multiplied by 0.50, equaling $6,000 per month. However, if Sarah can obtain a CPA letter documenting her actual 30% expense ratio, the calculation becomes $12,000 multiplied by 0.70, yielding $8,400 per month—a 40% increase in qualifying income from a single document.
Recommendation: Personal bank statements with CPA letter to maximize qualifying income. The low actual expense ratio makes the CPA documentation particularly valuable for this borrower.
Scenario 2: HVAC Contractor with S-Corp
Mike owns an HVAC installation and repair company structured as an S-Corporation. He employs three technicians and runs all business revenue through his company account. As the S-Corp owner, he pays himself a reasonable salary of $6,500 per month and takes quarterly distributions when cash flow allows. His business account shows strong revenue, but his personal account only reflects his modest salary plus occasional distribution deposits.
Financial Profile:
Personal Account Average Deposits: $8,500/month (salary plus some distributions)
Business Account Average Deposits: $45,000/month
Industry Expense Ratio: 55% for contractors
The comparison here is dramatic. Personal statements with 50% expense ratio yield $8,500 multiplied by 0.50, equaling just $4,250 per month in qualifying income. Business statements with the 55% contractor ratio yield $45,000 multiplied by 0.45, equaling $20,250 per month. The business statement approach produces nearly five times more qualifying income because it captures the full business revenue rather than just Mike’s salary.
Recommendation: Business bank statements are clearly the optimal choice. The higher expense ratio is more than offset by the dramatically higher deposit base. This scenario illustrates why brokers must always calculate both options when business accounts exist.
Scenario 3: Amazon E-Commerce Seller
Jennifer runs a successful Amazon FBA business selling home organization products. She sources products from overseas manufacturers, ships inventory to Amazon fulfillment centers, and Amazon deposits her revenue bi-weekly into her business account. Her business shows impressive gross revenue, but approximately 65% goes to product costs, Amazon fees, shipping, and advertising.
Financial Profile:
Personal Account Average Deposits: $15,000/month (owner draws)
Business Account Average Deposits: $85,000/month (gross Amazon revenue)
Industry Expense Ratio: 65% for retail/e-commerce
This scenario requires careful analysis. Personal statements yield $15,000 multiplied by 0.50, equaling $7,500 per month. Business statements with standard retail ratio yield $85,000 multiplied by 0.35, equaling $29,750 per month. If Jennifer can obtain a CPA letter verifying her actual 65% expense ratio, the business calculation remains $85,000 multiplied by 0.35, still $29,750—but this now accurately reflects her true income rather than potentially overstating it.
Recommendation: Business statements capture significantly higher qualifying income. However, CPA verification is important here to ensure the expense ratio accurately reflects actual costs. Without proper documentation, there’s risk of overstating income if actual expenses exceed the applied ratio.
Scenario 4: Management Consultant (Sole Proprietor)
David provides management consulting services to mid-size companies. He operates as a sole proprietor without a formal business entity, and clients pay consulting fees directly to his personal account. His expenses are minimal—a home office, professional memberships, and occasional travel. He estimates his actual expense ratio at only 25% of revenue.
Financial Profile:
Personal Account Average Deposits: $28,000/month
Business Account: N/A
Actual Expense Ratio: Approximately 25%
With only personal statements available, the standard calculation yields $28,000 multiplied by 0.50, equaling $14,000 per month. However, David’s low actual expenses make him an excellent candidate for CPA letter documentation. With verified 25% expenses, the calculation becomes $28,000 multiplied by 0.75, yielding $21,000 per month—a 50% increase in qualifying income.
Recommendation: Personal bank statements with CPA letter documenting low actual expenses. David represents the ideal CPA letter candidate—a high-income professional with genuinely minimal business costs.
Documentation Requirements Comparison
Understanding the documentation requirements for each program helps set borrower expectations and ensures smooth file submission. While both programs share some common requirements, business statement programs typically require additional documentation related to the business entity.
|
Requirement |
Personal Statements |
Business Statements |
|
Statement Period |
12 or 24 months |
12 or 24 months |
|
Self-Employment Verification |
2 years required |
2 years required |
|
Business License |
If applicable |
Required |
|
CPA Letter |
Optional (reduces ratio) |
Recommended (reduces ratio) |
|
P&L Statement |
Not typically required |
Some lenders require |
|
Entity Documents |
Not required |
Articles, Operating Agreement |
|
Ownership Verification |
N/A |
25%+ ownership required |
Common Pitfalls and How to Avoid Them
Even experienced brokers can make mistakes when selecting bank statement programs. Understanding these common pitfalls helps ensure optimal outcomes for every self-employed borrower.
Pitfall 1: Defaulting to Personal Statements
Many brokers automatically recommend personal statements because they seem simpler and require less documentation. While this instinct isn’t wrong in many cases, it can cost borrowers significant qualifying income when business accounts exist with higher deposit volumes. The solution is to always calculate both scenarios when a borrower maintains business banking, even if personal statements seem like the obvious choice. The five minutes spent on a comparison calculation can reveal thousands of dollars in additional qualifying income.
Pitfall 2: Overlooking CPA Letter Value
A CPA letter can increase qualifying income by 15-25% by reducing the applied expense ratio, yet many borrowers never consider this option. The assumption is often that obtaining the letter is too difficult or that the borrower doesn’t have a CPA relationship. In reality, many self-employed individuals already work with CPAs for tax preparation and business planning. The solution is to ask every self-employed borrower whether they work with a CPA who could provide an expense verification letter. Even if the answer is no, it opens a conversation about potentially engaging a CPA for this purpose.
Pitfall 3: Misunderstanding Expense Ratio Impact
Higher deposits don’t always translate to higher qualifying income. A business with $100,000 monthly deposits but 70% expenses qualifies for $30,000 monthly income. A business with only $60,000 deposits but 40% expenses qualifies for $36,000 monthly income. The solution is to calculate net qualifying income, not just gross deposits. The expense ratio is equally important as the deposit amount, and sometimes more so.
Pitfall 4: Double-Counting Transfers
If a borrower deposits business revenue into a business account, then transfers funds to personal accounts as owner draws, counting both as income creates an inflated picture that underwriters will catch. This can result in declined loans or significant delays while the file is re-analyzed. The solution is to choose one account type and exclude inter-account transfers from the deposit calculation. When analyzing personal statements, transfers from business accounts should be excluded since that income was already captured in the business account.
Frequently Asked Questions
Can a borrower use both personal and business statements together?
Generally no—lenders require choosing one documentation path. However, you can run calculations for both scenarios and submit whichever produces better qualifying income. This ensures you’re recommending the optimal program for each borrower’s specific situation.
What if personal deposits include transfers from business accounts?
Transfers from business accounts are excluded from personal statement income calculations to prevent double-counting. Only original source income such as direct client payments counts toward qualifying income when using personal statements.
Does the 50% expense ratio apply to all personal statement programs?
Most lenders use 50% as the standard, but some offer lower ratios for certain professions or with CPA documentation. Always confirm the specific lender’s guidelines and explore whether reduced ratios are available for your borrower’s profession or with supporting documentation.
Can a sole proprietor use business statements?
Yes, if the sole proprietor maintains a dedicated business account used exclusively for business transactions. The account doesn’t need to be under a formal entity—it just needs clear separation from personal banking and consistent use for business purposes.
How recent must bank statements be?
Most lenders require the most recent 12 or 24 consecutive months, with the final statement dated within 30-45 days of application. Statements that are too old will require updated documentation before the loan can proceed.
Partner with AHL for Bank Statement Programs
American Heritage Lending offers both personal and business bank statement programs with competitive expense ratios and flexible documentation options. Our experienced Account Executives understand the nuances of self-employed income qualification and can help you analyze scenarios and select the optimal program for each borrower.
Whether your client is a freelancer with straightforward personal deposits or a business owner with complex revenue streams, we have solutions designed to maximize qualifying income while maintaining sound underwriting standards.
Contact your Account Executive at (855) 340-9892 to discuss your next bank statement scenario, or become a partner at ahlendtpo.com to access our full suite of Non-QM solutions.