Year-to-date P&L: when a lender asks for one

This post covers when the main conventional and FHA rules call for a year-to-date P&L, what a lender does with it once it has one, and how to put one together so it holds up. For the full self-employed document list, see how self-employed borrowers document income for a mortgage. If you file on Schedule C as a contractor, our post on how lenders count 1099 contractor income covers the counting rules. None of this tells you whether your file will be approved. That depends on the whole picture.

What a year-to-date P&L is

A P&L is a simple report with three parts: money that came in (gross receipts or sales), money that went out (business expenses), and what was left (net income or loss). A year-to-date version covers the period from the first day of your business's tax year through the most recent month you can close out.

It does not replace your tax returns. Lenders still build their income figure mostly from the signed returns, or from tax transcripts, for the years the program requires. The P&L answers a narrower question: is the business still earning at about the level the returns show?

Two terms come up with it:

• Audited vs unaudited. An audited P&L has been examined by an outside accountant under formal audit rules. An unaudited P&L is one you, your bookkeeper, or your tax preparer put together without that review. Most self-employed borrowers have unaudited statements, and that is often fine for the purpose a lender has in mind.
• Balance sheet. This is a separate report listing what the business owns and owes on a given date. Some files need it alongside the P&L, and some do not.

When the conventional rules ask for one

Fannie Mae's Selling Guide says a lender may use a profit and loss statement, audited or unaudited, to support its view that your income is stable and likely to continue. It also says a year-to-date P&L is not required for most businesses. The trigger in that section is timing: if your loan application is dated more than 120 days after the end of the business's tax year, the lender may choose to require one when it believes the statement is needed to support that view. Source: Selling Guide B3-3.7-04

So under that guide the answer is maybe. The lender decides based on your file, and the guide ties that option to the 120-day mark. The broader self-employed section of the same guide asks lenders to look at year-to-year trends in gross income, expenses, and taxable income, on a yearly or interim basis, which is one place a current-year statement can help. That section also notes that a lender may want more recent business records, such as a current balance sheet, when you plan to use business funds for the down payment or reserves. Source: Selling Guide B3-3.5-01

The other conventional guide treats business financial statements as support, not as the income figure. Its self-employed section says statements such as a P&L and balance sheet can help a lender look at business liquidity, income stability while your returns are on extension, a newer business, and the effect of pulling money out of the business. It also says those statements may not be used to calculate stable monthly income unless they are audited, and that they can be prepared by a CPA, an accountant, the person who prepares the business tax returns, or the borrower. Source: Freddie Mac Guide 5304.1

When FHA asks for one

The FHA rule is firmer and easier to predict. The handbook says the lender must obtain a year-to-date P&L and a balance sheet if more than a calendar quarter has passed since the end of your most recent calendar or fiscal tax year. A balance sheet is not required if you report your self-employment income on Schedule C. Source: HUD Handbook 4000.1, II.A.4.c.x

The same paragraph adds one more test. If the income used to qualify you is higher than the two-year average from your tax returns, the lender needs either an audited P&L or a signed quarterly tax return obtained from the IRS. In plain terms, an unaudited statement can show the business is on track, but it usually cannot by itself lift your qualifying number above what your returns support.

Why the timing matters this time of year

If your business uses a calendar tax year, last year ended on December 31. By now, more than a calendar quarter and more than 120 days have passed. That means an FHA file for a calendar-year business will generally need a current P&L, and a conventional lender has room under its guide to ask for one too. If your returns for last year are still on extension, our post on self-employed tax extension checks before an offer covers what lenders look at while a return is pending.

If your business runs on a fiscal year that ends at some other point, count from that date instead. Ask the lender which tax period it is measuring from before you assume you are inside or outside the window.

What the lender does with it

Most of the time the lender reads the P&L against your returns rather than plugging it into the income formula. A few common uses:

• Trend check. Lenders compare current revenue and expenses to the same items on your last return. If the year looks steady or stronger, the P&L supports the income from the returns. If it looks weaker, the lender may ask questions or use a lower number. Our post on declining self-employed income walks through that situation.
• Adjustments. Under the conventional P&L section, if the lender did not already count your year-to-date salary or draws, it may add them to the P&L net profit, along with the same allowable adjustments it used on your returns, such as nonrecurring items, depreciation, and depletion. Only your share of the business counts if you own part of it.
• Newer business or extension. When the returns are thin or not yet filed, the statements give the lender something current to review alongside what it does have.
• Business funds. If you plan to use business money for the purchase, the lender may look at current statements to see that the withdrawal will not hurt the business.

How to put together one that holds up

1. Cover the right period. Start on the first day of your current tax year and run through the end of the most recent full month.
2. Show the three parts clearly: gross receipts or sales, expenses by category, and net income or loss.
3. Match your tax return layout. The conventional P&L section notes that a typical statement looks a lot like Schedule C, so using the same expense categories makes the comparison easier for an underwriter.
4. Sign and date it. Lenders often ask for your signature on an unaudited statement. Ask whether yours wants one.
5. Keep your business bank statements handy. A lender may compare deposits to the revenue on the P&L, so the numbers should line up with what actually went through your accounts.
6. Ask whether a balance sheet is needed. Under the FHA rule it generally is unless you file on Schedule C. Conventional lenders decide case by case.

If your expenses this year include large non-cash items like depreciation, our post on how business write-offs affect mortgage qualifying income explains why those are often added back.

How the programs compare

• Conventional, first guide: usually not required. A lender may ask for one when the application is dated more than 120 days after the business's tax year ended and it needs support for stability. Audited or unaudited can work as support.
• Conventional, second guide: statements support the analysis of liquidity, extensions, newer businesses, and business fund withdrawals. Not used to calculate stable monthly income unless audited.
• FHA: required once more than a calendar quarter has passed since the end of the latest tax year. Balance sheet too, unless you file Schedule C. Qualifying above the two-year return average needs an audited P&L or a signed quarterly return.

Questions to bring to a first conversation

• Will you need a year-to-date P&L for my file, and through which month?
• Does it need to be signed, prepared by my tax preparer, or audited?
• Do you also need a balance sheet?
• Will you use the P&L only as support, or could it change the income you count?
• How many months of business bank statements should I send with it?

FAQ

Can I write my own P&L?

Usually yes for an unaudited statement. The second conventional guide lists the borrower among the people who may prepare business financial statements. Some lenders prefer one from your tax preparer, so ask before you send it.

Will a strong P&L raise my qualifying income?

Generally not by itself. Lenders mostly calculate income from your returns. Under the FHA rule, qualifying above the two-year return average takes an audited P&L or a signed quarterly return, and the second conventional guide does not use unaudited statements to calculate stable monthly income.

What if my P&L shows the business is down this year?

The lender will likely look closer. It may ask for an explanation, more recent statements, or use a lower income figure. Talk through it early rather than at underwriting.

One thing to do

Sources: Fannie Mae Selling Guide B3-3.7-04, Analyzing Profit and Loss Statements, and B3-3.5-01, Underwriting Factors and Documentation for a Self-Employed Borrower; Freddie Mac Seller/Servicer Guide 5304.1; HUD Handbook 4000.1, II.A.4.c.x, Self-Employment Income, Required Documentation, Profit and Loss Statements and Balance Sheets.

Jeff Shin, Mortgage Loan Originator, NMLS #1041652. Chicago. Equal Housing Lender. Not a commitment to lend.