Lender Wants a P&L Statement? Relax

Written by Posted On Thursday, 10 November 2022 00:00

If you're self-employed or otherwise contract income exceeds 25% of your monthly income, you'll most likely be asked to provide a profit and loss statement, or a P&L.

Such borrowers will also be asked to provide the two most recent years of federal tax returns. When someone doesn't get paid on the 1st and 15th of the month, for example, lenders need to take a few extra steps to calculate qualifying income.

Lenders will ask for the most recent two years of federal income tax returns. Lenders want to see a relatively consistent income stream from one year to the next. In doing so, lenders will average the last 24 months of monthly income which will then be used to qualify for a home loan. In addition, the lender will also ask for year-to-date income and add those amounts into the total. 

The lender will then divide the gross amounts by the number of months used. For example, if the last month used to qualify comes in October, then the lender will add up 24 months of income plus 10 more months. The totals are then combined and divided by 34 (months).

But the self-employed borrower can also incur certain business expenses when amassing those numbers. This is where the P&L statement comes into play. Yet when asked to provide a P&L, it doesn't have to be a full fledged P&L verifying income plus expenses. In most cases anyway. Instead, the P&L asks you to list your gross monthly income and then subtract your expenses. Pretty simple. Besides, your bank statements provided to the mortgage company will also reflect your income and expenses, so this is a way of third party verification. 

In some cases, lenders will ask for an audited P&L. This means your P&L must be performed and reviewed by an accountant instead of just your own handiwork. This will take a small bit of time but shouldn't take too long as your accountant probably has the needed information already.

Some businesses take a lot of write-offs which will lower the tax burden but the result can also be a reduction in qualifying income. But in most cases, a handwritten P&L will suffice. It's not anything to be overly concerned about when asked for a P&L, it's just that the lender needs the information to get current qualifying income.

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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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