General Eligibility for Profit and Loss Mortgage Loans
General eligibility for Profit and Loss mortgage loans
The P&L mortgage loan is an essential tool for self-employed individuals, freelancers, and business owners who utilize tax write-offs that lower their reported taxable income, making traditional qualification difficult. Let’s cover the general eligibility for Profit and Loss mortgage loans.
Borrower and Employment Eligibility
Eligibility for P&L loans is strictly limited to self-employed individuals who can demonstrate stability and sufficient ownership in their business.
| Eligibility Requirement | Details and Documentation |
| Self-Employed Status | Loans are permitted only for self-employed borrower(s). Self-employed status is generally defined as having an ownership interest of 25% or more in a business. However, one Nation’s Direct P&L product (Product 130) requires a minimum of 50% ownership. |
| Employment History | The borrower must document that they have been self-employed for at least two years in the current business. The P&L Only program under Horizon is ineligible for borrowers with less than two years in the current business. |
| Exclusion for Self-Filers | Borrowers who prepare their own tax returns are not eligible for the P&L Statement Only product. |
| Business Verification | The existence of the business must be verified as active and operating within 30 calendar days prior to the note date. Verification sources include a business license, letter from the tax preparer, or Secretary of State filing. |
| Specialized Experience | Self-employed income in a licensed profession (e.g., Medical, Legal, Accounting) may be considered from a business in existence for less than two years (but greater than one year) if the borrower has at least two years of documented previous experience in the same field or related formal education. |
Documentation and Preparation Requirements
The credibility of the P&L document rests entirely on its third-party preparation and adherence to strict format rules:
- Required Preparer: The P&L statement must be prepared by a Third Party Certified Public Account (CPA), an IRS Enrolled Agent (EA), or a CTEC registered tax preparer (PTIN). Ineligible products, such as the Sharp Standard, specifically do not permit the P&L documentation type.
- Preparer Attestation: The CPA/EA/PTIN preparing the P&L must attest to having prepared the borrower’s most recent tax returns. The CPA/CTEC license must be verified and active and documented in the credit file.
- Signatures and Timing: The Profit and Loss must be signed by both the borrower and the tax preparer. The P&L end date must be less than 90 days old at closing, though the our Sharp series requires the end date to be less than 60 days old at closing.
- Business Narrative: A borrower narrative describing the nature of the business is generally required.
Financial and Credit Requirements
P&L loans are associated with higher risk due to the alternative income documentation, which leads to strict requirements regarding credit score and down payment (reflected by maximum LTV).
| Requirement Type | Range/Minimum | Specific Program Examples |
| Minimum FICO Score | Generally 660–700+ | our Horizon P&L Only requires 700+ FICO. Our Edge P&L requires a minimum of 680 FICO. |
| Maximum DTI | Typically capped at 50% | The our Advantage/Expanded program caps DTI at 50%. |
| Max LTV/Min Down Payment | Varies by transaction and lender. | Our Connect P&L Only has a maximum LTV of 75%. Our Edge P&L allows Max 80% LTV for Purchase, 75% LTV for Rate/Term, and 70% LTV for Cash-Out Refinance. |
| Credit History | Must adhere to the program’s seasoning requirements for derogatory events (e.g., bankruptcy or foreclosure). | For our Advantage, bankruptcy requires 24 months seasoning for LTVs ?80%. |
General Non-QM Eligibility and Transaction Types
As Non-QM loans, P&L products are required to comply with specific federal mandates while retaining the flexibility to structure the loan outside of GSE guidelines.
- Ability to Repay (ATR): All Non-QM loans must include an Ability-to-Repay (ATR) assessment to determine the applicant’s capacity to repay the mortgage debt.
- Underwriting Method: P&L loans typically require a manual review. We often use the Fannie Mae Cash Flow Analysis (Form 1084) or an equivalent for self-employment income calculation.
- Transaction Types: P&L documentation is eligible for Purchase, Rate/Term Refinance, and Cash-Out Refinance. Cash-out refinancing for Non-Permanent Resident Aliens is not eligible.
- Property Types: Eligible properties often include 1-4 unit residential properties, PUDs, and Warrantable/Non-Warrantable Condos. The our Edge 12/24 Month P&L product, however, is restricted to Primary Residence only.
- Ineligible Income Sources: Borrowers who only receive income from passive or portfolio sources (e.g., managing own rental properties, day trading, property flippers) are ineligible for the Bank Statement program. This principle generally extends to the P&L product, which targets active business revenue.
FAQ's
P&L Statement Only products often require a high minimum score, such as 700 FICO for all borrowers under our Connect and Horizon programs. Other P&L eligible programs may require a minimum of 660 or 680 FICO.
Yes, all Non-QM loans, including those using P&L documentation, must satisfy the Ability-to-Repay (ATR) requirements by documenting the borrower’s capacity to repay the debt.
Yes, NPRAs are eligible for Alt Doc programs, provided they have eligible visa classifications (e.g., E, G, H, L, O, P, & TN). They are often subject to stricter limitations, such as 75% maximum LTV and ineligibility for Cash-Out Refinance.
Yes, P&L loans (Non-QM) offer flexibility to borrowers with past credit issues. Eligibility requires meeting specific seasoning periods, which can be as short as 24 months after the event for maximum 80% LTV, depending on the specific program.
Non-QM Alt Doc loans generally allow for a maximum DTI ratio of 50%. Some programs may allow up to 55% if the borrower has a FICO score of 700 or greater.
Self-employed borrowers who prepare their own tax returns are not eligible for the P&L Statement Only program.
The P&L statement must be prepared by a Third Party Certified Public Accountant (CPA), an Enrolled Agent (EA), or a PTIN licensed Tax Preparer.
The borrower must verify they have been self-employed in the current business for the last two years to qualify for P&L programs.
The borrower must be documented as self-employed with at least 25% ownership interest in the business.
P&L mortgage loans are designed for self-employed borrowers or independent business owners, entrepreneurs, and contractors whose income doesn’t fit the standard mold of W-2s or conventional tax returns.
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