B3-3.4-04, Analyzing Profit and Loss Statements (04/01/2009)

The lender may use a profit and loss statement—audited or unaudited—for a self-employed borrower’s business to support its determination of the stability or continuance of the borrower’s income. A typical profit and loss statement has a format similar to IRS Form 1040, Schedule C.

A year-to-date profit and loss statement is not required for most businesses, but if the borrower’s loan application is dated more than 120 days after the end of the business’s tax year, the lender may choose to require this document if it believes that it is needed to support its determination of the stability or continuance of the borrower’s income.

If the lender did not count the borrower’s year-to-date salary or draws in determining the borrower’s qualifying income, it may add them to the net profit shown on the profit and loss statement as well as adding any of the allowable adjustments it used in analyzing the tax returns for the business, such as nonrecurring income and expenses, depreciation, and depletion.

However, only the borrower’s proportionate share of these items may be considered in determining the amount of income from the business that the borrower can use for qualifying purposes.