How is income calculated for Profit and Loss Mortgage loans

Certain programs impose a minimum expense ratio floor of 15% for P&L income, meaning businesses reporting less than 15% expenses will be limited to that 15% ratio in the calculation.

The eligible deposits on the bank statements must support the gross receipts listed on the P&L. For example, the eligible deposits must be within 15% of the gross revenues listed on the P&L.

The minimum expense factor for a product-based business is 40%.

If the income trend is declining and has not stabilized, the income may not be used for qualifying purposes.

When declining income is present and the borrower is qualifying using documentation covering 24 months (such as bank statements used with a P&L), the last twelve (12) months of income must be utilized to qualify.

The net income must be adjusted to reflect a 20% expense level when qualifying.

The qualifying income used is the lower of the net income calculated from the P&L statement(s) or the monthly income disclosed on the initial signed 1003.

Expenses such as depreciation, depletion, and amortization/casualty losses listed on the P&L may be added back to the applicant’s income to increase the qualifying cash flow.

Lenders must use the Fannie Mae Cash Flow Analysis (Form 1084) or an equivalent form for calculating self-employment income.

The qualifying income is the monthly net income from the P&L divided by the total number of months covered by the statement, then multiplied by the borrower’s ownership percentage.