Woman reviewing financial documents at home while calculating income from bank statements for a Colorado mortgage.

If you are self-employed or a business owner considering a mortgage, understanding how to calculate income from bank statements is essential. Many home buyers throughout Centennial, Parker, Lone Tree, Aurora, Highlands Ranch, and other Colorado communities turn to bank statement loan programs because traditional tax returns often don’t reflect their true earning power.

Bank statement programs give lenders a more accurate, real-world view of your income by looking directly at your business cash flow rather than taxable income after deductions.

How Lenders Review Your Bank Statements

Lenders typically analyze either 12 or 24 months of bank statements. The goal is to identify eligible deposits, remove anything that isn’t revenue, and determine an average monthly income based on actual business activity. This approach aligns with general income documentation principles outlined by organizations such as Fannie Mae, Freddie Mac, and the Consumer Financial Protection Bureau (CFPB), even though bank statement loans are considered non-QM products.

1. Identifying Eligible Deposits

Lenders review your statements line by line to determine which deposits count as income. Eligible deposits typically include:
• Customer payments
• Business revenue
• Merchant service deposits
• Recurring, documentable income streams

Deposits not counted as income include:
• Account transfers
• Owner contributions
• Loan proceeds
• One-time refunds or insurance checks
• Cash deposits that cannot be sourced

This step ensures only true business revenue is used to calculate qualifying income.

2. Applying an Expense Factor or CPA Letter

Once total eligible deposits are calculated, the lender applies an expense ratio to estimate net income. Depending on your business type, this may come from:
• A standard industry expense factor, or
• A customized expense letter from your CPA confirming your actual business expense percentage

This mirrors general financial analysis practices used in traditional lending while giving self-employed borrowers more flexibility.

3. Averaging the Final Income

After expenses are accounted for, the remaining income is averaged over 12 or 24 months. The result is your qualifying monthly income, which determines how much home you can afford.

Example Calculation

If your business shows $240,000 in eligible deposits over 12 months and a 50 percent expense factor is used:

$240,000 × 50 percent = $120,000 usable income
$120,000 ÷ 12 months = $10,000 monthly qualifying income

This averaged figure is what lenders use for mortgage qualification, not the total deposit volume.

Who Benefits Most from Bank Statement Income Calculations?

These programs are especially helpful for:
• Self-employed borrowers
• Business owners who write off significant expenses
• Contractors, gig workers, and freelancers
• Buyers with variable income month to month

Because this method looks at real deposits instead of taxable income, many Colorado buyers qualify for a higher amount than they would using tax returns alone.

Colorado-Specific Considerations

In Colorado markets like Centennial, Englewood, Castle Rock, and Denver, many small business owners rely on bank statement loans due to fluctuating seasonal income or high annual deductions. Requirements may include:
• 12 or 24 months of personal or business statements
• Proof of business ownership
• Strong credit and responsible banking history

Understanding the documentation upfront helps streamline the process.

Final Thoughts

Knowing how to calculate income from bank statements can open doors to mortgage options that better reflect your true financial picture. If you’d like help reviewing your statements or determining your qualifying income, I’m always here to walk you through the numbers.

Reach out anytime at rbaxter@choicemortgage.com or (303) 670-0137, or visit our Centennial office at 9200 E Mineral Ave #100, Centennial, CO 80112.

If you want a deeper dive specifically into how Colorado bank statement loan programs work, you can also read my article here:
https://www.cohomesandloans.com/how-to-calculate-income-for-bank-statement-loans-colorado/

You can also explore more helpful mortgage education on my blog:
https://www.cohomesandloans.com/blog

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