What is a P&L loan?

A P&L loan (profit and loss loan) is a special program that allows you to use your business Profit & Loss statement to qualify for a mortgage instead of relying on tax returns and other traditional income verification methods. You can use a Profit and Loss loan to buy an owner-occupied primary home, a second home, or even an investment non-owner occupied home. As with a bank statement loan, the P&L loan can be a good choice for self-employed borrowers and business owners that can show solid business income, but who may be intentionally keeping their personal income low for tax purposes.

How do Profit and Loss loans work?

Instead of providing tax returns, W2s, and 1099s like you would when applying for a conventional mortgage, you typically show the lender a 12-month Profit and Loss statement prepared by a CPA, licensed accountant or tax preparer. The P&L statement needs to cover at least 1 year, but some lenders might ask for the previous year's statement plus the year-to-date P&L statement. The lender will determine your income based on the P&L statement and will deduct expenses that also appear on the statement. In some cases, they might subtract an additional expense percentage (i.e, 10% is common).

Profit and Loss loan highlights

• Loan amounts can up to the $3M to $3.5M range
• Required minimum FICO scores are in the mid to upper 600s (e.g., 650-700)
• The maximum loan-to-value is usually 80%, meaning you need 20% downpayment
• Can be used for a home purchase, a regular refinance, or a cash out refi

Borrower requirements to be approved for a P&L loan

The requirements to qualify for a Profit and Loss mortgage vary by lender, but the following criteria are pretty common in the industry:

FICO score of 680 or higher

A FICO of 680 is usually the minimum required credit score to be considered for a P&L loan, but some lenders will accept FICOs as low as 600. The higher the FICO, the higher the LTV (loan to value) you can get. For example, if your credit score is only 600, then the maximum LTV is typically 65%. Meaning, you'll have to have 35% downpayment with a 600 FICO. If your score is 680 or higher, then you can usually get a 80% LTV loan.

Two years of self-employment history

You'll need to document that you've been self employed in the same line of business for at least 2 years.

Debt to income ratio (DTI)

The debt to income ratio allowed varies depending on several factors, with the LTV being an important one. In general, your DTI can be in some cases as high as 50% with a 75% loan-to-value loan, and in other cases your DTI needs to be in the low 40s with higher LTV loans. If you're a first time home buyer, the DTI allowed is generally going to be in the 43% - 50% range.

Gift funds allowed for downpayment and closing costs

Some lenders allow 100% gift funds for downpayment and closing costs, while others will require you to have a least 5% of your own funds. If you are purchasing an investment property, then usually gifts funds will be limited to 80%-90%, meaning you'll have to contribute at least 10 to 20 percent of your own funds towards the downpayment and closing costs.

When is a Profit and Loss loan a good choice?

A P&L loan can be a good option if you run a business or are self employed, but have difficulty getting approved for a bank statement loan. Because a Profit and Loss loan only looks at your P&L statement, there won't be a need for detailed scrutinization of your bank statements. A P&L loan is also a good alternative to a conventional mortgage if you are a business owner or self employed individual that reports a smaller personal income on your tax returns, but has a strong business cash flow.