Compiling a Profit and Loss Statement

Written by Posted On Thursday, 09 June 2022 00:00

When you're self-employed or at least get a bulk of your income from a business or service you own and you apply for a home loan, you're likely to be asked to provide a profit and loss statement, or P&L. This document, along with your business and personal bank statements, allows lenders to properly calculate income. Not gross income, but net income. Income after business expenses are deducted. For those first timers who are asked to provide a P&L, it might be a little intimidating. Where do you start? How do you put one together?

First, there are two basic requests for a P&L. The first one is an audited P&L prepared by a licensed accountant or financial adviser. This type goes beyond just listing income and expenses but is third-party verified, separate from what an individual would put together. Such a report is a very detailed document. However, most often when a lender requests a P&L, the audited report isn't needed and it can be one put together by the individual applicant.

Why do lenders ask for one in the first place? Self-employed borrowers are typically asked to provide the last two years of income tax returns. The lender then takes this information and then averages it over two years then dividing it by 24 (months) to arrive at a qualifying monthly amount used to calculate debt ratios. But if we're say 10 months into the year, there are no filed tax returns yet there is business income.

The lender wants to see if a current year-to-date P&L is similar to the two year average. If there is a sudden drop in YTD income, the lender will be a bit more than just curious and ask why there is such a discrepance in income. If the YTD income is accepted, and it generally is, by the way, it is then added to the 24 month total. In this example using 10 months of YTD income, the total income is then divided by 34. If the YTD income is increasing, the lender can then make the determination to use the higher amounts to arrive at an average.

But being asked to provide an updated P&L is relatively simple. In fact, it's nothing more than listing YTD income and then subtracting any YTD expenses. This is something you can do on your own and an accountant isn't needed. You can certainly ask your accountat to prepare one for you but it's really not necessary. It's nothing more than adding income and subtracting expenses. Some businesses may not have any notable expenses at all. 

When a lender asks for an updated P&L, it's not time to panic. It's simply one of the ways lenders arrive at a qualifying monthly income amount to be used during the approval process. Nothing fancy. You don't have to put it into a spreadsheet or anything like that. You can  simply enter your income on a Word document and subtract your expenses. It probably will take you10-15 minutes at most. Don't overthink this. It's a simple process.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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