Keeping your current home while buying another can create flexibility, but qualifying with two properties…
How We Calculate Qualifying Income for a Bank Statement Loan
Self-employed borrowers can have strong cash flow while their tax returns show less income after legitimate business deductions.
For a bank statement loan, qualifying income is generally calculated by reviewing eligible deposits over a set period, subtracting non-income deposits, applying any required business expense factor, and averaging the result into monthly income.
In this guide, we explain which deposits may count, what gets excluded, how personal and business accounts are treated, and why the final calculation can vary by program.
Key Takeaways
- Core Calculation: Eligible deposits are adjusted for exclusions and, when applicable, business expenses before being averaged into monthly income.
- Statement Period: Programs commonly review 12 or 24 months of statements, although requirements vary by lender and borrower profile.
- Deposit Review: Transfers, loan proceeds, refunds, and other non-income deposits generally are not treated as qualifying revenue.
- Best For: Bank statement loans may fit self-employed borrowers whose tax returns do not fully reflect the cash flow available to support a mortgage.
At WestPac Lending (NMLS# 264390), we help self-employed borrowers review their cash flow, documentation, and property goals before deciding whether a bank statement program is an appropriate option.
Quick Answers About Bank Statement Income
- How is monthly qualifying income calculated? A common method is to total eligible deposits, apply any required expense adjustment, and divide the result by the number of statement months reviewed.
- Do transfers between accounts count as income? Generally, no. Transfers move existing money rather than create new income, so they are usually excluded to prevent double counting.
- Can we use personal or business bank statements? Potentially. The available approach depends on where revenue is deposited, how the business operates, and the guidelines of the selected program.
- Does every deposit count? No. Deposits must be reviewed to determine whether they represent recurring business revenue or another acceptable income source.
The Basic Bank Statement Income Formula
A simplified calculation may look like this:
Eligible deposits × allowable income percentage ÷ number of months reviewed = average monthly qualifying income
The “allowable income percentage” reflects how much deposited revenue remains after applicable business expenses. If personal statements contain income that has already been reduced by business expenses before deposit, the treatment may differ. Program guidelines and lender overlays determine the exact calculation.
A Simplified Example
Assume a business account shows recurring client revenue over a 12-month review period. We first identify and remove transfers, loan proceeds, refunds, and other deposits that do not represent business revenue. We then apply the program’s accepted expense factor to the remaining deposits and divide the adjusted total by 12.
The resulting figure is the borrower’s calculated average monthly income for that account. It is not automatically the final income used for approval. Ownership percentage, other debts, deposit trends, credit, reserves, and property eligibility still affect the full underwriting review.
Step 1: Determine Which Accounts and Statement Period Apply
The first task is deciding which bank accounts provide the clearest record of recurring income. A borrower may receive revenue through a business account, a personal account, or both.
Bank statement programs commonly use a 12- or 24-month history. A longer period can provide a broader view of cash flow and may smooth out seasonal changes, while a shorter period may better reflect recent business performance. Availability and qualification standards vary.
We also check whether all pages are present and whether the account owner, account number, and statement dates are consistent. Missing pages or unexplained gaps can delay the analysis because the lender needs a continuous, verifiable record.
Step 2: Identify Eligible Income Deposits
Eligible deposits are deposits that can reasonably be documented as income generated by the borrower or the borrower’s business. Depending on the program, these may include:
- Customer or client payments
- Merchant processing deposits
- Electronic payments tied to business activity
- Checks received for products or services
- Recurring deposits supported by invoices or business records
Consistency matters. A stable pattern of deposits is generally easier to evaluate than irregular activity with no clear connection to the business. Underwriters may compare deposits with a business license, professional license, accountant letter, profit-and-loss statement, invoices, or other records.
These supporting items do not necessarily replace the statements. They help establish that the deposits come from an active business and represent revenue rather than borrowed or transferred funds.
Step 3: Exclude Deposits That Are Not Income
A bank statement analysis is not simply the sum of all deposits. Each deposit may need to be categorized so that money is not counted twice or treated as income when it came from another source.
Common exclusions include:
- Transfers between accounts: Moving money from one account to another does not create income.
- Loan proceeds: Borrowed funds create an obligation and generally are not revenue.
- Tax refunds or purchase refunds: These typically represent returned funds rather than ongoing earnings.
- Owner contributions: Personal money placed into a business account may not represent business revenue.
- Duplicate deposits: Funds should not be counted in both a payment platform and the receiving bank account.
- Unverified large deposits: A significant deposit may require documentation showing its source and business purpose.
Clear records make this step easier. Separate business and personal accounts, consistent deposit descriptions, and organized invoices can help an underwriter follow the flow of funds.
Step 4: Apply the Business Expense Factor
A business expense factor estimates the portion of gross business deposits used to operate the business. The remaining portion may be treated as income available to the borrower, subject to program rules.
Expense levels vary significantly by business type. A consultant working from a home office may have a different cost structure than a contractor who pays for materials, equipment, vehicles, and employees. For that reason, some programs use a standard expense factor, while others may permit a more tailored factor supported by documentation from a qualified third party.
Acceptable documentation and expense calculations vary by lender. A letter or profit-and-loss statement does not automatically establish the factor an underwriter will use. The lender may evaluate whether the stated expenses are reasonable for the type and scale of business.
Step 5: Account for Business Ownership
If a borrower owns only part of a business, the qualifying income calculation may be adjusted to reflect that ownership interest. For example, counting all adjusted business revenue for a borrower who shares ownership could overstate the income available to that person.
Underwriters may request organizational documents, ownership schedules, tax forms, a business license, or a letter from a qualified professional to verify the borrower’s percentage of ownership. The selected program determines how ownership affects the calculation.
Step 6: Review Deposit Stability and Trends
The average is only one part of the analysis. Underwriters also review whether deposits are stable, increasing, seasonal, or declining.
A recent decline can matter even if the longer-term average appears sufficient. The lender may ask for an explanation, updated statements, or additional business documentation to determine whether the income is likely to continue. A single strong year does not always offset a material recent drop.
Seasonal businesses require context. Lower deposits during an expected off-season may not carry the same meaning as an unexplained decline across several consecutive months. Documentation showing the normal operating cycle can help provide that context.
Personal Statements vs. Business Statements
| Review Area | Personal Statements | Business Statements |
|---|---|---|
| Primary focus | Income deposited for the borrower’s personal use | Gross revenue received by the business |
| Expense treatment | May already reflect business expenses paid before funds were transferred | Often requires an expense factor to estimate net available income |
| Common concern | Separating income from transfers, gifts, and other personal deposits | Separating revenue from borrowed funds, transfers, and owner contributions |
| Supporting records | May include evidence connecting deposits to the business | May include ownership records, business licenses, invoices, or expense documentation |
Neither method is automatically better. We compare the available records and program guidelines to determine which approach provides the most accurate and supportable income calculation. Borrowers can review a broader overview of Orange County bank statement loan requirements before beginning the documentation process.
How Bank Statement Loans Differ From Other Income Approaches
A bank statement loan evaluates recurring deposits rather than relying solely on the standard tax-return calculation used for many conventional mortgages. It still requires documented income, a complete credit review, and an evaluation of the borrower’s ability to repay.
| Loan Approach | Primary Income Focus | Potential Fit |
|---|---|---|
| Bank statement loan | Eligible personal or business deposits | Self-employed borrowers with documentable cash flow |
| Conventional loan | Agency-defined income documentation, often including tax returns for self-employment | Borrowers whose qualifying income can be documented under agency guidelines |
| DSCR loan | Investment property cash flow under program rules | Real estate investors financing an eligible rental property |
For an investment property, a DSCR loan program may offer a different qualification route because it focuses on the property’s rental income and housing expense rather than the borrower’s business deposits.
Other Factors That Affect Qualification
Calculated bank statement income does not determine approval by itself. The lender also evaluates factors such as:
- Credit history and current obligations
- Debt-to-income ratio under the program’s standards
- Funds available for the down payment, closing costs, and reserves
- Business history and evidence that income is likely to continue
- Property type, occupancy, appraisal, and title
- Condominium or HOA eligibility, when applicable
- Loan size and current county or program limits
This can be especially relevant in Orange County communities such as Irvine, Newport Beach, Huntington Beach, Costa Mesa, and Laguna Niguel, where higher property values may require additional review of loan size, reserves, and property eligibility. Move-up buyers may also need to coordinate proceeds from an existing home, down payment funds, and the timing of a purchase.
How to Prepare for a Bank Statement Review
- Gather complete statements. Include every page, even if a page is blank or contains only disclosures.
- Separate business and personal activity. Clear account separation can reduce questions about transfers and non-business deposits.
- Identify recurring revenue. Note which deposit descriptions correspond to customers, payment processors, or contracts.
- Document unusual deposits. Keep records for large, one-time, or unfamiliar transactions.
- Review recent trends. Be prepared to explain material changes in revenue or business operations.
- Avoid unnecessary account movement. Frequent transfers can make the source of funds harder to trace.
We recommend reviewing statements before making an offer or starting a refinance. An early analysis can identify documentation gaps and provide a more realistic estimate of the income a program may recognize. Rates, fees, expense factors, and underwriting requirements change, so current information should always be verified for the specific scenario.
Review Your Bank Statement Scenario With Us
With more than 26 years of mortgage industry experience, we provide mortgage guidance for homebuyers, homeowners, self-employed borrowers, and real estate investors. We can review how deposits are structured, compare available loan approaches, and explain the documents that may be needed.
Call, text, or email us to discuss your purchase or refinance plans in Orange County or another market we serve. For buyers, we can also incorporate the bank statement review into pre-approval planning so the income calculation, funds needed, and next steps are clearer before you shop for a property.
Frequently Asked Questions
Can declining deposits affect bank statement loan qualification?
Yes. A lender may evaluate recent deposits separately from the longer-term average if revenue shows a material decline. Updated statements, an explanation, or additional business records may be required to assess whether the income is likely to continue.
How is income handled if I jointly own the business?
The calculated income may be adjusted based on your verified ownership percentage and the program’s rules. Organizational records or documentation from a qualified professional may be needed to establish your share of the business.
Can rental deposits in a bank account be included?
Rental deposits may require separate treatment because rental income and investment properties can have their own documentation rules. The lender will review the source, lease documentation, property expenses, and selected loan program before deciding what income is eligible.
What happens if one month includes an unusually large business deposit?
The underwriter may request an invoice, contract, payment record, or other evidence connecting the deposit to normal business activity. If the source cannot be verified or the deposit is not considered recurring revenue, some or all of it may be excluded.
Can a bank statement loan be used for different occupancy types?
Depending on the program, bank statement financing may be available for a primary residence, second home, or investment property. Occupancy rules, pricing, down payment expectations, reserves, and property requirements vary, so the intended use must be disclosed and reviewed.
This is educational and not financial advice. Loan programs and guidelines can change. Talk with a licensed mortgage professional about your specific scenario.
About the Author
Steve Rivas
President at WestPac Lending · NMLS #287708
Steve Rivas is the founder of WestPac Lending, a Savi Ranch Financial, Inc. company, and has been serving borrowers since 1999.
Specializes in: Bank statement loans, FHA loans, Refinance loans
Licensed in: CA, CO, FL
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