Profit & Loss Loan

Last Updated: 03/24/2024

Loan Highlights

  • Profit and Loss Loans cater to self-employed individuals, business owners and entrepreneurs who may not qualify for traditional mortgages due to variations in income or difficulty documenting income.
  • Financing based on their business’s profit and loss statements rather than traditional income documentation.
  • Best to use instead of Bank Statement Loan if you have a business entity that verify income since it also allow you to adjust your income on the P&L (in legal ways).
  • Slightly higher LTV than Bank Statement Loan
  • Ranges from $50,000 to several million dollars, depending on borrower qualifications and property value.

Interest Rate Estimate

Federal Fund Rate + 3% Margin (typically with 90% LTV Primary Residence) | Highly  fluctuating and not consistent between end funders.
*The mortgage interest rate calculation above is estimated. The subject borrower for that interest rate is as follow:
  • 740 FICO score
  • 30 years fixed interest rate
  • Primary residence
  • Single family house

Terms and Breakdown:

  • Interest rates: Typically fixed or can be ARM.
  • Loan terms: Typically 15 or 30 years amortized.
  • Capped at 90% LTV – Primary Residence
  • Capped at 85% LTV – Second Home
  • Capped at 80% LTV – Investment (residential)
  • Income verification based on profit and loss statements of business, financial statements, and bank statements rather than tax returns or pay stubs.

Requirements:

  • FICO: 600+
  • DTI: 45/50
  • History: No Bk or Foreclosure
  • Typically requires 12 to 24 months of profit and loss statements or business bank statements to verify income.
  • Stable business revenue and sufficient cash flow to support loan payments.
  • Debt-to-income ratio may be more flexible compared to traditional mortgages.
  • Property appraisal to determine market value and loan-to-value ratio.
  • Documentation:
    • Typical Documents: Alternative documentation (alt-docs) including profit and loss statements, business bank statements (3 months), and asset statements.
    • Full documentation (full docs) such as tax returns may also be required in some cases.

Derivative or Related Products:

  • Asset-Depletion Loans: Allow borrowers to use assets such as business assets or investment portfolios to qualify for a mortgage without traditional income documentation.
  • Stated Income Loans: Similar to Profit and Loss Loans, stated income loans allow borrowers to state their income without providing traditional income verification.

Funder and Sponsors:

  • Profit and Loss Loans may be offered by banks, credit unions, or specialized lenders catering to self-employed individuals and small business owners.

Notes:

  • Common misunderstandings with Profit and Loss Loans include:
    • Higher costs: Profit and Loss Loans may come with higher interest rates or fees compared to traditional mortgages due to the increased risk for lenders.
    • Stricter underwriting: While Profit and Loss Loans offer flexibility in income verification, lenders may still have strict requirements for credit score, debt-to-income ratio, and property appraisal.
    • Documentation requirements: Borrowers should be prepared to provide extensive documentation of profit and loss statements, business bank statements, and financial history to meet lender requirements for Profit and Loss Loans.