How to Qualify for an FHA Loan Using Profit & Loss Statements
Qualifying for a conventional mortgage can be challenging for the self-employed, whose tax returns often show reduced income due to deductions.
An FHA loan and a profit & loss (P&L) statement can be a powerful combination to overcome this hurdle.
What is an FHA loan, and who can qualify?
An FHA mortgage is insured by the Federal Housing Administration (FHA). This unique backing by the U.S. government makes an FHA loan less risky for mortgage professionals, who can offer more flexible requirements compared to conventional mortgages.
- A low down payment is one of the biggest advantages of an FHA loan. The minimum down payment is either 3.5% or 10% of the home’s purchase price.
- FHA loans have lenient credit score requirements. Borrowers with scores as low as 500 may qualify. Those with credit scores of 580 or higher often qualify for a 3.5% down payment. Scores below that threshold may require a 10% down payment.
- FHA loans have flexible debt-to-income ratio (DTI) guidelines. A borrower with a DTI of up to 50% could qualify for an FHA loan.
While they’re accessible to anyone, FHA loans are popular among first-time homebuyers.
What are profit & loss statements, and how do you get them?
A profit and loss (P&L) statement summarizes business income and expenses, usually spanning 12 to 24 months. It shows the money coming in, the money going out, and determines net profit – earnings after expenses.
Mortgage professionals often rely on statements instead of tax returns or pay stubs during the loan approval process. For the self-employed, a P&L statement may be the best way to demonstrate financial stability.
Can you create a P&L statement yourself? Generally, not for a mortgage loan. For that, you usually need a P&L statement from a Certified Public Accountant (CPA), tax preparer, or qualified accountant.
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Preparing Your P&L Statement
Along with a P&L statement, the preparer will typically include a verification letter, which usually specifies your ownership percentage and time in the business. Having at least a 25% ownership stake is a common requirement. While you typically need two years of self-employment history, the FHA may accept one year in the business with related work experience.
Calculating Your Income
During the loan approval process, a mortgage professional is particularly interested in your bottom line: net profit. How is that calculated?
Take, for example, a business with $1 million in revenue and $500,000 in expenses in one year. That leaves $500,000 in net profit. Dividing by 12 gives you about $41,600 per month in qualifying income. With that number, a mortgage professional can calculate your DTI and determine how much you may borrow.
FHA Loan Uses and Flexibility
- Home Purchase. With a credit score of 580 or higher, you can probably buy a home with as little as 3.5% down. In many cases, 100% of that down payment can be gifted from a family member, friend, employer, or organization.
- Home Types. FHA loans are only for primary residences – you must live in the home for at least one year. No investments, second homes, or vacation homes.
- Rate and Term Refinancing. You can refinance an FHA loan to reduce monthly payments* with a lower interest rate or change the length of the loan. You can refinance to another FHA loan or switch to a conventional loan.
- Cash-Out Refinancing. With at least 20% equity in the home, FHA guidelines allow you to borrow up to 80% of a home’s value in cash.
Pros & Cons of Profit & Loss Statements for FHA Loans
Pros
- Qualifying with Business Income. With a P&L statement loan, you qualify based on your verified cash flow – not the net income on your tax return. For the self-employed who use deductions to lower their tax burden, this can be a simple way to navigate around a roadblock.
- No Reserves Required. With some other P&L-based loan programs, mortgage professionals may require up to 12 months of cash reserves – enough money in the bank to cover mortgage payments for one year. This FHA loan program has no cash reserves requirements.
- Make Stronger Offers. This program eliminates the need for a ‘sale of prior home’ contingency. You can make a compelling offer without needing to sell your current home first. This is a significant advantage in competitive markets.
- Low Down Payment & Gift Funds. A key benefit of FHA loans – down payments as low as 3.5% – applies with P&L statement approval. That down payment can be gifted to cover the full down payment, closing costs, and other fees.
- Flexible Debt-to-Income Ratios. While conventional loans often adhere to a maximum DTI of around 43%, FHA guidelines are more generous. Approval with DTIs of up to 50% is common. For borrowers with existing debt – such as car payments, student loans, or credit cards – this can make a critical difference.
Cons
- CPA Requirement. Your P&L statement must be prepared by a CPA or a qualified tax preparer. If you don’t already work with such a professional, you will need to find one. This could add time and cost to the homebuying process.
- Potentially Higher Costs. As with all mortgage loans, interest rates for FHA loans are largely based on your financial profile. As a P&L borrower might present a slightly higher risk, they may get a slightly higher rate compared to other FHA borrowers.
- Planning Risk. A P&L statement shows your recent income, but it doesn’t predict future earnings. If you can’t reasonably expect to see continued earnings at your current rate or higher, you could face a mortgage that’s difficult to manage.
For many entrepreneurs, freelancers, and independent contractors, using a P&L to qualify for an FHA loan offers a path to homeownership, leveraging business success into long-term financial stability.
To discuss how your profit & loss statement might qualify you for an FHA loan, contact an Equinox mortgage expert at 1-888-505-8960 or connect with us online.
*Refinancing Disclaimer: When it comes to refinancing your home loan, you can generally reduce your monthly payment amount. However, your total finance charges may be greater over the life of your loan.