Professional Documentation Requirements for a P&L Only Loan
Professional Documentation Requirements for a P&L Only Loan
The P&L Statement Only program is restricted to self-employed borrower(s) only. A fundamental rule across several Non-QM programs is that self-employed borrowers who file their own tax returns are not eligible for the P&L Only program. Furthermore, borrower-prepared P&L statements will not be permitted under any circumstances and must meet strict Professional Documentation Requirements for a P&L Only Loan, ensuring that all financials are prepared, signed, and validated by a licensed CPA or qualified third-party accounting professional.
Required Third-Party Professional Preparation
- Eligible Preparers: The Profit & Loss statement must be completed by a qualified third-party. Acceptable professionals typically include a Certified Public Accountant (CPA), an IRS Enrolled Agent (EA), or a CTEC registered tax preparer.
- PTIN Eligibility: While CPA/EA/CTEC are widely accepted, certain programs, such as those in the CMG Edge Series, specify that tax preparer letters prepared by PTINs (Paid Tax Professionals) are ineligible for P&L preparation.
- P&L End Date: The P&L end date must be less than 90 days old at closing.
Professional Attestation and Verification Mandates
We require the tax professional to verify both the borrower’s tax filing history and the integrity of the P&L data:
- Filing Requirement: The CPA/EA/CTEC preparing the P&L must have filed the borrower’s most recent business tax returns (or personal/business tax returns).
- Verification of P&L Accuracy: The tax professional must attest that they have performed either of the following functions:
- Audited the business financial statements.
- Reviewed working papers provided by the borrower.
- Based on this review, they must certify that the P&L represents an accurate summary of the business cash flow and applicable cash expenses.
- Preparer Independence: The CPA/EA/CTEC must provide attestation that they prepared the borrower’s tax returns and that they are not related to the borrower or associated with the borrower’s business.
- Professional Licensing: The credit file must contain documentation that the CPA/EA/CTEC license is verified and active. A screenshot of the IRS website for an Enrolled Agent (EA) is acceptable verification.
- Supporting Information: The preparer must provide a signed document on their business letterhead reflecting their address, phone number, and license number. They must also confirm the borrower’s name, business name, and percentage of business ownership.
Signing and Income Calculation Details
The professionalism requirements extend to the final signed documentation and the method by which the qualifying income is derived:
- Signing Requirement: The P&L statements must be signed by both the borrower(s) with ownership and the CPA/EA/CTEC. In our Edge Series, the prepared P&L must be wet signed by both parties.
- Qualifying Income Calculation: The qualifying income is the net income calculated from the business’s P&L Statement, multiplied by the borrower’s percentage of ownership. This calculated income is then compared to the monthly income disclosed on the initial signed 1003 (loan application), and the lower of the two figures is used for qualification.
- Non-Cash Add-Backs: Non-cash expenses listed on the P&L, such as depreciation, depletion, and amortization/casualty losses, may be added back to the net income for qualification.
- Minimum Expense Floor: Expenses must be reasonable for the industry. If the expenses reported on the P&L are deemed too low, the net income may be adjusted upward for qualification purposes. A minimum expense factor of 20% is often expected for gross revenue (especially for service-related businesses).
Supplemental Bank Statement Verification
While the product is named “P&L Statement Only,” it is crucial to note that bank statements are still required to corroborate the P&L data.
- Verification Period: A minimum of two months of business bank statements is typically required for verification.
- Revenue Support: The deposits on the bank statements must support the gross receipts/sales reflected on the P&L statement. For example, eligible deposits on the bank statements must be within 15% of the gross revenues listed on the P&L.
FAQ's
If tax returns for the borrower are provided, the loan will be rendered ineligible for the P&L Statement Only product and must be underwritten based on Full Documentation.
The preparer must provide a signed document on their business letterhead reflecting their address, phone number, and license number.
The credit file must contain documentation that the CPA/CTEC license is verified and active. For an Enrolled Agent (EA), a screenshot of the IRS website is acceptable.
The P&L end date must be less than 90 days old at closing for some programs. For others (like the Sharp Series), the P&L end date must be less than sixty (60) days old at closing.
The Profit & Loss statements must be signed by both the borrower(s) with ownership and the CPA/EA/CTEC.
The CPA/EA/CTEC must attest that they have performed either an audit of the business financial statements or have reviewed working papers provided by the borrower.
The preparer must provide attestation that they are not related to the borrower or associated with the borrower’s business.
The CPA, EA, or CTEC preparing the P&L must attest to having prepared the borrower’s most recent personal/business tax returns.
Self-employed borrower(s) who file their own tax returns are not eligible for the P&L Statement Only program. Additionally, a P&L statement prepared by the borrower will not be permitted under any circumstances.
The P&L statement must be prepared by a qualified third party, such as a Certified Public Accountant (CPA), an IRS Enrolled Agent (EA), or a CTEC registered tax preparer.
527 Sycamore Valley Rd W, Danville, CA 94526
Toll Free Call : (866) 280-0020
For informational purposes only. No guarantee of accuracy is expressed or implied. Programs shown may not include all options or pricing structures. Rates, terms, programs and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions may apply. Equal Housing Opportunity.
Interactive calculators are self-help tools. Results received from this calculator are designed for comparative and illustrative purposes only, and accuracy is not guaranteed. Shining Star Funding is not responsible for any errors, omissions, or misrepresentations. This calculator does not have the ability to pre-qualify you for any loan program or promotion. Qualification for loan programs may require additional information such as credit scores and cash reserves which is not gathered in this calculator. Information such as interest rates and pricing are subject to change at any time and without notice. Additional fees such as HOA dues are not included in calculations. All information such as interest rates, taxes, insurance, PMI payments, etc. are estimates and should be used for comparison only. Shining Star Funding does not guarantee any of the information obtained by this calculator.
Privacy Policy | Accessibility Statement | Term of Use | NMLS Consumer Access
CMG Mortgage, Inc. dba Shining Star Funding, NMLS ID# 1820 (www.nmlsconsumeraccess.org, www.cmghomeloans.com), Equal Housing Opportunity. Licensed by the Department of Financial Protection and Innovation (DFPI) under the California Residential Mortgage Lending Act No. 4150025. To verify our complete list of state licenses, please visit www.cmgfi.com/corporate/licensing