Profit and Loss Statement Mortgage: Buy a Home Without Tax Returns

One of the biggest benefits of being a business owner in the U.S. is that you can deduct a significant amount of your taxable income, offsetting your tax burden and encouraging your entrepreneurial journey.

But this distinct advantage also has a drawback when it comes to applying for a home loan: banks may perceive your lower reported income as indicative of poor financial standing or a high debt-to-income ratio, which can affect loan approval.

So how can you pursue a mortgage without using your tax returns? A profit and loss statement mortgage is one option, and that's exactly what we're going to cover.

What is a Profit and Loss Statement Mortgage Loan?

A profit and loss (P&L) statement loan is a specialized mortgage product that allows potential borrowers to apply for a home loan with specially prepared financial documents instead of using traditional documentation like tax returns or W2s.

These statements are generally prepared by a certified public accountant (CPA), and they provide a comprehensive overview of a business's revenue, costs, and expenses over a specific period of time (typically one year).

Lenders will use these documents rather than tax returns to help them verify an applicant's income and assess their ability to repay the loan.

This is especially beneficial for business owners and self-employed individuals, as these statements recognize that some borrowers have unique financial circumstances and need a more accurate method to show their income.

Who Is a Profit and Loss Statement Mortgage Best Suited For?

P&L statement loans are best suited for individuals who have a difficult time proving their income with traditional documentation (W2s, pay stubs, tax returns), such as:

• Self-employed individuals
• Business owners
• Seasonal workers
• Commission-based earners (1099)
• Freelancers, contractors, or gig workers
• Businesses with only one year of tax returns

If you fall into one of these non-traditional categories or your income ebbs and flows from month to month (or year to year), a P&L statement mortgage may be worth exploring.

What are the Requirements to Get a Profit and Loss Statement Mortgage Loan?

Now that you better understand what a profit and loss statement mortgage loan is and who this type of loan is for, how do you go about getting one?

Requirements vary by lender, since P&L loans are typically non-QM products without a single set of government-wide standards. Most lenders will ask for some combination of the following:

• Certified P&L Statement: A P&L covering roughly 12 to 24 months, drafted and certified by a CPA, to give to your lender.
• Credit Score: Minimum credit score requirements differ by lender. Ask your lender directly what threshold applies to your program.
• Debt-To-Income Ratio (DTI): Lenders use DTI as a factor in assessing whether you can manage monthly payments, and acceptable DTI ranges vary by lender and loan program.
• Down Payment: These types of loans often require a larger down payment than a conventional loan, and the required amount depends on your lender and financial profile.
• Personal Asset Statements: Lenders might also check your assets to make sure you have the money to pay for extra debts that might crop up during the term of your loan.

How to Increase Your Odds of Securing a Profit and Loss Statement Mortgage Loan

If you're looking to get a P&L statement loan and want to have the best chance possible at getting favorable terms, follow these simple steps:

Increase Your Credit Score

The relationship between credit scores and mortgages is hard to ignore. That's why you want to ensure your credit score is as strong as possible. A number of actions can be taken to improve your credit score over time, such as:

• Paying your bills on time
• Reducing credit card balances or paying them off completely
• Maintaining a low revolving utilization rate
• Working with a credit repair specialist to remove derogatory remarks from your credit report

Lower Your Debt to Income Ratio

Lenders generally prefer a lower DTI ratio, though the exact threshold varies by lender and loan program.

Some lenders allow a higher DTI for qualified borrowers, but keeping this percentage as low as possible generally improves your options.

Have Cash in Reserve

Some lenders may require you to have a certain amount of liquid reserves on hand to cover your mortgage payments in case something happens.

Even if they don't require it, having cash reserves shows that you have the skill to manage your finances and are prepared to handle emergencies.

Ask your lender how many months of reserves they'd like to see for your specific loan program.

Have All Your Documentation Ready

You want to be over rather than under-prepared to get a profit and loss statement loan. That means bringing along proof of income and personal asset statements, and, in most cases, you will also be required to have a CPA draft a letter for you that includes:

• Your percentage of ownership in the business
• How long you have been self-employed
• The current operational status of the business

Work with a Knowledgeable Lender

While a range of lenders offer P&L statement loans, you want to ensure that your chosen lender has experience working with individuals that match your financial circumstances.

They will have a better understanding of the unique challenges that entrepreneurs, contractors, business owners, and other non-traditional borrowers face.

They will also know exactly which types of programs and products may be a fit for your mortgage needs. And that's the core of what we do at Modern Day Lending.

We have more than two decades of experience working with homeowners outside the "traditional borrower" model, which enables us to work toward customized solutions that fit your budget and needs.

When we work together, you can expect all of the following from our knowledgeable, professional lending team:

• Complete Application Transparency: We work with you every step of the way to keep the application process open and transparent so you can move forward with confidence.
• Competitive Rates: While P&L statement loans tend to come with higher rates, we'll work with you to try to get them as low as possible for your situation.
• Responsive Service: We work hard to move your file forward efficiently so you can act on the home that has caught your eye.
• Unparalleled Customer Service: Our goal is to make the home-buying process as simple as possible for you. We’ll answer any questions you may have about the mortgage process, P&L statement loans, or any other questions about buying a home.

Speak to an expert and take the first steps toward exploring your options.