P & L STATEMENT PURCHASE
Essential Elements

A Profit and Loss (P&L) loan, also known as a “bank statement loan” or “self-employed mortgage,” is designed for individuals, often self-employed, who do not have traditional income documentation (like W-2s or tax returns) but can provide other forms of documentation to verify their income, typically through business or personal bank statements, or Profit and Loss statements. This type of loan is often used when traditional lending qualifications don’t apply due to variable income sources. The essential elements of a P&L loan typically include:

Profit and Loss Statement
– The P&L statement is the core document that shows the borrower’s income over a period of time, typically 12 or 24 months.
– Often prepared by a certified public accountant (CPA), tax preparer, or the borrower if they are well-versed in accounting. Lenders typically require it to be signed by a CPA for verification.
– Lists the business’s revenues, expenses, and profits, providing a summary of the borrower’s net income from self-employment or business activities.

Credit Score
– Although traditional income documentation isn’t required, a strong credit score is essential to qualify for a P&L loan. The higher the credit score, the better the loan terms (lower interest rates, higher loan-to-value ratios).
– Minimum Requirements: Generally, lenders prefer a credit score of 620 or higher, although this can vary depending on the lender.

Loan-to-Value Ratio (LTV)
– The LTV is the ratio of the loan amount to the appraised value of the property. P&L loans may have more conservative LTV ratios compared to traditional loans due to the higher perceived risk.
– Typical LTV: Often ranges from 70% to 80%, meaning borrowers need to make a down payment of 20% to 30%.

Down Payment
-A larger down payment may be required for a P&L loan, typically ranging from 20% to 30%. This compensates for the perceived risk since income documentation is less straightforward.
– Impact: A higher down payment can help secure a lower interest rate or better loan terms.

Debt-to-Income Ratio (DTI)
– Consideration: The DTI ratio measures how much of the borrower’s income goes toward debt payments. Even though income is determined differently, the DTI ratio is still considered to assess the borrower’s ability to repay the loan.
– Standard Limits: Lenders typically prefer a DTI below 43%, though some may allow flexibility depending on other factors like credit score or assets.

Interest Rates
– Tends to be Higher: Since these loans are riskier for lenders due to the non-traditional documentation of income, interest rates are often higher than those of conventional loans.
– Rate Factors: The borrower’s credit score, down payment, LTV, and overall risk profile will affect the interest rate.

Reserves
– Lenders often require borrowers to have cash reserves (savings) to cover several months’ worth of mortgage payments, typically 6 to 12 months, depending on the loan amount and risk assessment.
– This acts as a safety net, showing the borrower has enough liquid assets to handle the mortgage in case of a temporary income shortfall.

Business License or Proof of Self-Employment
– To establish the legitimacy of the borrower’s business or self-employment, lenders may require proof of a business license, business registration, or documentation proving the borrower’s self-employed status.

P&L loans are a more flexible option for self-employed or non-traditionally employed individuals, but they come with specific requirements for income verification, larger down payments, and often higher interest rates due to the perceived risk.