How do you meet atr requirements for profit and loss mortgage loans

The core of meeting ATR for P&L loans is verifying stable income (ATR Factor 1) when formal tax returns are insufficient or undesirable for qualification.

A. Preparer and Documentation Requirements

To ensure the income documentation is reliable, strict standards are placed on who prepares the P&L statement:

1. Independent Preparation: The Profit and Loss (P&L) statement must be prepared by a qualified third party, defined as a Certified Public Accountant (CPA), an IRS Enrolled Agent (EA), or a CTEC (California Tax Educational Council) registered/licensed tax preparer.
2. Ineligible Preparers: Borrower-prepared P&L statements are not permitted under any circumstances. Likewise, self-employed borrowers who file their own tax returns are generally not eligible for the program.
3. Attestation and Verification: The CPA/EA/CTEC preparing the P&L must attest to having prepared the borrower’s most recent tax returns. They must also attest that they have performed functions such as auditing the business financial statements or reviewing working papers provided by the borrower.
4. Ownership and History: The borrower must be self-employed in the same business for at least two years to qualify. They must also demonstrate a minimum ownership interest of 25% in the business, which must be documented via a CPA letter, Operating Agreement, or equivalent.
5. Timing: The P&L end date must typically be less than 60 days or 90 days old at closing.
6. Tax Transcripts: Unlike Full Doc loans, tax returns and IRS Form 4506-C transcripts are generally not required for the P&L Statement Only program.

B. Income Calculation for ATR (ATR Factor 1)

The calculated monthly income must be stable and have a reasonable expectation of continuance for at least three years.

1. Qualifying Income Calculation: The qualifying income for the borrower is determined by the net income from the P&L, divided by the number of months covered (usually 12 or 24 months), and then multiplied by the borrower’s percentage of ownership. The income used is the lower of the calculated P&L income or the income disclosed on the initial signed loan application (1003).
2. Expense Ratio Floor: We require the reported expenses to be reasonable for the business’s industry. Some programs enforce a minimum expense factor to prevent underreporting:
   – If the P&L expenses are less than a specified minimum (e.g., 20% of gross revenue or 15%), the net income will be adjusted to reflect that minimum expense level for qualifying purposes.
3. Depreciation Addbacks: Depreciation, depletion, and amortization/casualty losses listed on the P&L may be added back to the applicant’s income for calculation.