Introduction
This section provides guidance on how to evaluate profit and loss statements for individuals who own their own businesses and are applying for a mortgage.
Analyzing Profit and Loss Statements
When someone who owns their own business applies for a mortgage, the lender will look at the business’s profit and loss statement. This document shows the business’s income and expenses. It’s similar to the tax form called IRS Form 1040, Schedule C that businesses use. This helps the lender decide if the person’s business income is steady and likely to continue, which is important in determining if they can afford to pay back the mortgage.
Not all businesses need to show a profit and loss statement that is up to date for the entire year. However, if the business owner is applying for a mortgage more than 120 days after their business’s tax year has ended, the lender might ask for this document. The lender uses it to help decide if the person’s business income is steady and likely to continue.
If the lender did not include the income the borrower pays themselves from the business (salary or draws) when figuring out how much mortgage the borrower can afford, the lender can add this income back into the business’s net profit shown on the profit and loss statement. The lender can also add back in any adjustments it made when looking at the business’s tax returns. These adjustments might include income and expenses that don’t happen regularly, as well as depreciation and depletion. However, the lender can only consider the borrower’s share of these amounts. This means if the borrower owns only part of the business, only the income and adjustments related to their portion can be used in deciding how much income from the business can be used to qualify for the mortgage.
References
For more details, visit Analyzing Profit and Loss Statements of the Fannie Mae Selling Guide.