Transform Your Company’s Profits Into Homeownership Using P&L Loans
If you’ve ever dreamed of owning a home but you haven’t been able to qualify for a conventional mortgage because of your unique income as a business owner, you’re not alone. In the U.S. there are 33.2 million small businesses, which accounts for 99.9% of all businesses in the country. The great news is, there are mortgages for business owners like P&L loans. Don’t say goodbye to your homeownership dreams or refinance possibilities just because of your non-traditional income – your business’ success should be celebrated.
In this guide, we’ll be exploring the P&L loans, including how they work, what’s required, pros and cons, and more. While we cannot provide tax advice, we can provide you with all the information that you need about P&L loans Keep on reading to learn more!
What Are P&L Loans?
The US tax system offers unique benefits to business owners and self-employed individuals, allowing them to reduce their taxable income through various deductions. This can significantly lower their tax burden. However, this tax strategy can create obstacles when seeking a mortgage.
Traditional lenders, like the big banks, often struggle to accurately assess the true income of self-employed applicants due to the complexity of their financial documentation.
Enter P&L loans, also known as profit & loss statement loans. P&L loans are non-QM loans (non-qualified mortgages) that offer an alternative pathway to homeownership or refinancing for those with less traditional income streams. P&L loans focus on the financial health of your business instead of relying on traditional income documents like W2s, pay stubs, and tax returns.
By analyzing your business’s profit & loss statements, lenders assess your average income over a specific period to determine your ability to repay the loan. Since P&L statements are a requirement to qualify for a P&L loan, they’re technically mortgages for business owners who might otherwise face difficulties in the conventional mortgage market.
How Are P&L Loans Calculated?
A profit and loss statement provides a comprehensive view of a company’s financial health by detailing revenue and expenses over a certified period. Unlike bank statements or tax returns, it offers a more accurate picture of a business owner’s or self-employed individual’s true earnings.
This statement balances income with deductible expenses, revealing both the actual financial situation and the strategic use of tax benefits. As a result, it presents a clearer representation of an entrepreneur’s earning potential than other financial documents.
Who Would Benefit From a P&L Loan?
The main demographic that would benefit from a P&L loan is business owners and others whose income might not be reflected on their tax returns – oftentimes due to write-offs and business deductions – since P&L statements are required to qualify. However, individuals who are self-employed and have P&L statements can also benefit from a P&L loan.
P&L loans cater to the distinctive needs of self-employed borrowers and business owners who are looking to purchase or refinance, making them an ideal option for this particular demographic.
P&L Loans Compared to Other Loan Types
P&L Loans vs. Bank Statement Loans
P&L loans and bank statement loans are fairly similar in several ways. They’re both non-QM loans, geared toward business owners and self-employed individuals, and don’t need any traditional income documents to qualify. However, they differ in terms of what type of documents are required for income verification. As their names suggest, P&L loans require P&L statements and bank statement loans require bank statements where as P&L loans don’t require bank statements and vise-versa.
Due to their requirements, bank statement loans are available for a wider range of borrowers since most people have a bank account. Compared to P&L loans, borrowers need to have a business that produces P&L statements and have them prepared for and signed by a Certified Public Accountant (CPA).
P&L Loans vs. Conventional Loans
As we’ve previously covered, P&L loans are non-QM loans that use a business owner’s P&L statements as the main income verification method. In contrast, conventional loans are QM loans (qualified mortgages) that have to follow strict lending standards set by the Consumer Financial Protection Bureau (CFPB).
This means that conventional lenders have to assess the borrower’s ability to repay using traditional income documents, like W2s, pay stubs, and tax returns, and other metrics like their debt-to-income (DTI) ratio. For entrepreneurs and self-employed individuals, these strict requirements can make it difficult to qualify for a conventional loan.
P&L Loan Requirements
Requirements for P&L loans vary depending on the lender. To give you a better idea of what you can expect, these are our requirements at Defy:
- CPA prepared and signed P&L
- Borrowers must be self-employed for at least two (2)
- Business must be in existence for at least two (2) years
- Minimum FICO score of 600 (with reduced LTV)
- Maximum loan-to-value (LTV) of 90%
- Maximum loan amount of $6M
- No tax returns, 1099s or bank statements
- 30-year fixed, adjustable, interest-only options
What Does a Lender Look for in P&L Statements?
During a P&L loan application, lenders analyze your profit & loss statements to evaluate your business’ financial health and stability. They typically look for a consistent and reliable stream of income over a set period, showing that your business can generate revenue consistently and meet your future loan obligations. Lenders might also analyze trends in your revenue to assess growth or stability. Positive trends signal a healthy business, while declining revenue or significant fluctuations could raise red flags.
P&L Loan Interest Rates
P&L loan interest rates vary on a few different factors, like the lender, market rates, and your credit score. While it’s difficult to give an exact estimate, When compared to the market rate, they still rise and fall in a similar pattern. You can also generally expect P&L loan interest rates to be slightly higher than conventional rates. Though a higher rate may not be ideal, it could potentially be worth it to achieve your homeownership dreams.
Where Can You Get a P&L Loan?
While P&L loans are offered by banks and credit unions, private mortgage lenders can often be a good resource. These lenders typically specialize in alternative financing solutions, and their expertise in P&L loans can streamline the closing process and help you feel confident about your loan. It’s always wise to compare rates and terms from all potential lenders, including banks, credit unions, and private institutions, to find the best fit for your situation.
Pros and Cons of P&L Loans
Pros:
- Opportunity to become a homeowner as an entrepreneur, business owner, or self-employed individual
- P&L statements show your true income
- No tax returns or other traditional income documents required
- Faster approval process
Cons:
- Limited availability
- Can have slightly higher interest rates compared to conventional loans
- Potentially higher down payment required compared to conventional loans
P&L Loan Alternatives
If you’re still unsure about whether P&L loans are right for you, there are plenty of other non-QM loan options. Non-QM loans are designed to appeal to a wide array of borrowers, making them more flexible and unique. Here are a few other options to consider, but keep in mind, they might not exactly match your needs, which is why it’s crucial to research all different loan options:
- Bank Statement Loans: Use your bank statements to qualify.
- Asset Depletion Loans: Use your liquid assets to qualify.
- Debt-Service Coverage Ratio (DSCR) Loans: Use rental income to qualify.
Need help deciding on which loan option is right for you? Contact us at Defy for a complimenary consultation. We offer all of these loan options and more to help you find the perfect fit.
P&L Loan FAQs:
- What is a P&L loan?
A P&L loan, short for profit & loss statement loan, is a financing option that uses your business’ P&L statements to qualify for a home loan.
- Are P&L loans non-QM?
Yes, P&L loans are considered non-QM loans (non-qualified mortgages) since they don’t follow the strict lending rules set by the Consumer Financial Protection Bureau (CFPB).
- How does a P&L loan work?
P&L loans assess your business’ profitability through your P&L statements. Instead of focusing on a regular paycheck, lenders evaluate your average income over a specific period to determine how much you can afford to borrow.
- Who should consider getting a P&L loan?
P&L loans are geared towards business owners that have P&L statements. This could also include self-employed individuals, as long as they have P&L statements for their business.
- What are the qualification requirements for a P&L loan?
Qualification requirements for P&L loans vary depending on the lender. At Defy, this is what we require for our P&L loans:
- CPA prepared and signed P&L
- Borrowers must be self-employed for at least two (2)
- Business must be in existence for at least two (2) years
- Minimum FICO score of 600 (with reduced LTV)
- Maximum loan-to-value (LTV) of 90%
- Maximum loan amount of $6M
- No tax returns, 1099s or bank statements
- 30-year fixed, adjustable, interest-only options
- What’s the minimum credit score needed for a P&L loan?
The exact minimum credit score required for a P&L loan depends on each lender. At Defy, we require a minimum FICO score of 600 or above with reduced LTV.
- Can I get a P&L loan with bad credit?
Getting a P&L loan with bad credit may be difficult, but not impossible. Since every lender sets their own minimum credit score requirements, there’s a chance you’ll be able to find a lender who will accept your credit score for a P&L loan.
- How much of a down payment do I need for a P&L loan?
Down payment requirements for P&L loans depend on the lender and your qualifications, but you can expect to put down anywhere between 10-30%. At Defy, we require a minimum of 10% down for our P&L loans.
- Can I get a P&L loan with no down payment?
No, you most likely won’t be able to get a P&L loan with no down payment. Most lenders need some form of a down payment due to their maximum LTV requirements.
- Where can I get a P&L loan?
P&L loans are available from banks, credit unions, or private mortgage lenders. When shopping for a P&L loan, private mortgage lenders, like Defy, tend to specialize in alternative mortgage solutions. Their experience with these unique loan types can help speed up the closing process and allow you to borrow with confidence.
- Are P&L loans technically mortgages for business owners?
Yes, P&L loans are technically mortgages for business owners since they heavily rely on a business’ P&L statements to see if a borrower can qualify. And remember, your P&L needs to be prepared for and signed by a CPA.
