Profit and Loss for Self Employed borrowers Home Loan

Self Employed COVID Mortgage Rules Change

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Profit and loss statements (“P & L’s”) play a major role for self employed consumers looking for a home loan. Whether for a refinance or a purchase, mortgage underwriters review self employed borrower’s profit and loss statements.

However, COVID adds a new level of importance to the “P & L”. During odd times like the current Pandemic, loan guidelines add weight to the P & L scale.

What is a Profit & Loss?

P & L’s tell a story. They emulate the related tax return form. From the perspective of a home loan application the P & L serves as a placeholder for un-filed Federal Tax returns.

For example, a P & L showcases business sales/revenue, expenses and net profit through a specific month in a calendar year. In other words, when no current year tax return is available for a loan application submitted in July of a given year – a P & L through July takes it’s place. However, a P & L does show much of the same info a tax return would and will show. The difference here – Profit and Loss statements represent year to date data for any month of the current year.

Why a Profit & Loss?

Income trends matter. For self-employed borrower’s applying for a home loan they matter a lot. Depending on loan type, underwriters have 1 or 2 years tax returns and a year to date profit and loss in front of them. Each is used for various reasons.

However, collectively tax returns and year to date profit and loss reveal income trends. Income trends can create a “slippery slope” concern for underwriters. Decreasing income trends may be problematic. In fact, the most concerning trend is from the most recent tax return into the year to date Profit and Loss.

Ultimately, profit and loss statements provide the most up to date glimpse at a business’ income trends.

COVID Era Profit & Loss Rules

If you own a business, chances are COVID may have governed sales down to an abnormal level. This little unavoidable nuance then finds it’s way onto a year to date Profit & Loss statement. Normally (in other words pre-COVIDly) subpar income levels presents a large triangular shaped “YIELD” sign in the underwriting approval process. In fact, such scenarios often have underwriter’s seeing octagonal RED!

Instead, during COVID some loan products have empathy. They understand the financial dip many self employed borrowers seeking a home loan have experienced. Instead of flashing yellow and red street lights, some loans take a more expanded approach in these instances.

For business owners who did the COVID stumble and then recovered and can show that have options. Certain loan products will accept that and allow far more flexibility regarding income and approval. Every loan application is unique. Your loan officer needs to work through the details and solutions together with you. The good news – self employed borrowers have more flexibility regarding COVID related income decreases on eligible loan products.

By Jeremy House