-
What is a P and L Statement Mortgage Loan For Self-Employed Borrowers
I heard there are non-QM loans for self-employed borrowers that do not require federal income tax returns and no income documentation and is called P and L Statement Non-QM loans. How does the the P and L Statement Mortgage Loan program for self-employed borrowers work? I heard that a CPA Letter is required on a P and L statement non-QM mortgage loan? How does that work?
-
2 Replies
-
A P&L (Profit and Loss) statement is a financial document that mortgage lenders require from self-employed borrowers or borrowers who derive income from a business. It is a crucial component of the loan application process for these types of borrowers.
Here’s what a P&L statement is and why it’s important for self-employed borrowers seeking a mortgage:
- Definition: A P&L statement, also known as an income statement, is a financial report that summarizes the revenues, costs, and expenses incurred by a business over a specific period, typically a year or a fiscal quarter.
- Purpose: For self-employed borrowers or those with business income, a P&L statement provides lenders with a comprehensive view of the borrower’s business profitability and financial performance. This information is essential for assessing the borrower’s ability to repay the mortgage loan.
- Key Components: a. Revenue: This section lists the total income or revenue generated by the business from sales, services, or other sources. b. Cost of Goods Sold (COGS): For businesses that sell physical products, this section includes the direct costs associated with producing or acquiring the goods sold. c. Gross Profit: The difference between revenue and the cost of goods sold. d. Operating Expenses: This section details the various expenses incurred in running the business, such as rent, utilities, salaries, marketing, and other overhead costs. e. Net Income: The final profit or loss figure, calculated by subtracting operating expenses from the gross profit.
- Verification: Lenders typically require a P&L statement to be prepared or reviewed by an independent third-party accountant, such as a Certified Public Accountant (CPA) or an Enrolled Agent (EA). This adds credibility and reliability to the financial information provided.
- Supporting Documentation: In addition to the P&L statement, lenders may also request supporting documents like business tax returns, bank statements, and other financial records to corroborate the information presented in the P&L.
By analyzing the P&L statement, lenders can assess the stability, consistency, and profitability of the borrower’s business income. This information, along with other factors like credit score, debt-to-income ratio, and assets, helps lenders determine the borrower’s overall creditworthiness and ability to make mortgage payments.
For self-employed borrowers or those with complex income sources, providing a comprehensive and accurate P&L statement is crucial for obtaining mortgage approval and securing favorable loan terms.
-
A Profit and Loss (P&L) statement for self-employed mortgage borrowers works similarly to a standard P&L statement used in business accounting. It provides a snapshot of the borrower’s income, expenses, and net profit over a specific period, typically one year. Lenders often require self-employed individuals to submit a P&L statement along with other financial documents when applying for a mortgage.
Here’s how it generally works:
-
Income: The P&L statement starts by listing the borrower’s total income from self-employment. This may include revenue from services rendered, sales of goods, or any other sources of income related to the borrower’s business activities.
-
Expenses: Next, the statement outlines the various expenses incurred in running the business. This could include costs such as materials, utilities, rent, employee wages, insurance, marketing expenses, travel expenses, etc. It’s essential to include all legitimate business expenses to accurately reflect the financial health of the business.
-
Calculating Net Profit or Loss: After listing all income and expenses, the P&L statement calculates the net profit or loss for the period. This is done by subtracting total expenses from total income. If the result is positive, it indicates a net profit, while a negative result indicates a net loss.
-
Adjustments: Sometimes, lenders may require adjustments to the P&L statement to account for non-recurring expenses, depreciation, or other factors that might affect the borrower’s income stability. These adjustments help provide a clearer picture of the borrower’s financial situation.
-
Accuracy and Documentation: It’s crucial for self-employed borrowers to ensure the accuracy of their P&L statements. Lenders may request supporting documentation such as bank statements, invoices, tax returns, and other financial records to verify the information provided in the statement.
-
Impact on Mortgage Approval: Lenders use the P&L statement, along with other financial documents, to assess the borrower’s income stability and ability to repay the mortgage. A strong, consistent income history demonstrated through the P&L statement can strengthen the borrower’s mortgage application.
Overall, the P&L statement for self-employed mortgage borrowers serves as a vital financial document that helps lenders evaluate the borrower’s income and financial stability, ultimately influencing the mortgage approval process.
-