Not all NonQM bank statement loans are created equal. Learn about the different options to calculate expense ratios including a flat 50%, industry specific, CPA stated, etc.
If you’re new to business bank statement loans, we’d recommend checking out the 6 Simple Steps to Calculating Income on a Business Bank Statement Loan article we’ve written. Below we’ll go over the common options that wholesale lenders offer for the expense ratio (basically the ratio used to calculate the profit / qualifying income of the business).
Most Common - 50% Expense Ratio
The easiest and most common option for an expense ratio is just using a flat rate of 50%. The majority of NonQM lenders out there will let you use this. Basically, if you have $50,000 in average usable business monthly deposits they’ll let you use $25,000 as your qualifying income for the borrower.
CPA / Accountant Stated Expense Ratio
Many lenders also will allow a stated expense ratio from the borrower’s accountant who files their taxes. With this route, the borrower’s CPA will state something along the lines of “I confirm that I have filed the business returns for Main Street Business for the most recent tax filing season. I can confirm that the expense ratio for this business is xx%.” This helps underwriting use that percentage to calculate income accurately to this specific business. Watch out to confirm what the requirements are for this - some lenders require it to be by the client’s CPA signed on letterhead while others have less stringent requirements (keep in mind, not all tax preparers are CPAs). Many lenders cap this at 20% or more expense ratio.
Ratios Based on Industry / Business Type / Number of Employees
Similar to the above ratio, this is designed to be fair to each business. Some lenders will have ratios that will be based on the type of business along with the number of employees. This makes sense because a single person business will tend to have less expenses than a business with 20 employees. On that same note, a service based business (think insurance agent, real estate agent, graphic designer, etc) will typically have less expenses than a goods based business (think someone selling products online or in a store). A service based business with no employees may have an expense ratio of 20% (aka 80% of revenue deposits can be used as income) vs a goods based service business with many employees will have an expense ratio over 50% often (aka you’ll be able to use LESS than half of the average deposits as income).
Our Advice
If you can qualify based on the flat 50% expense ratio, that’s usually the path of least resistance/paperwork. If not, lenders that allow a lower expense ratio based on the type of business and number of employees make it easy (although not many have this option). Lastly, if the client’s tax preparer or CPA is able to write the lender, finding a lender that allows a CPA stated ratio can be another route.
To check out all the NonQM Lenders out there, click here to go to our NonQM page.
