If you’re a small business owner looking to buy a home, traditional mortgages may not be the best fit. That’s where bank statement and profit and loss (P&L) loans come in—they’re designed for self-employed individuals who don’t have standard income documentation.
In this article, our mortgage experts at The Mortgage Minds Group explore how these loans work and provide tips to help you get approved so you can confidently move forward with your home-buying journey.
What Is a Bank Statement Loan?
How does a bank statement loan work? It uses your personal or business bank statements to prove your income to qualify. Lenders typically want 12 to 24 months’ worth of deposits in bank accounts to estimate income. Bank statement loans are great for small business owners who don’t get a regular paycheck but can show steady deposits in their accounts.
What Is a Profit & Loss (P&L) Loan?
A P&L loan uses your business's profit and loss statement to verify your income instead of bank statements. This financial document shows your business’s revenues, expenses, and profits (or losses) over a specific period, like a month, quarter, or year.
P&L statements help lenders understand how well your business performs financially. Sometimes, lenders also require a certified public accountant (CPA) to prepare or verify your P&L statement to ensure it’s accurate.
Bank Statement Loan vs. P&L Loan—Which Is Best for You?
For a small business owner deciding between a bank statement loan and a profit and loss (P&L) loan, the key is understanding your financial documentation and how to show your income to a lender best. Here are five factors to consider:
1. The Type of Documentation You Can Provide
Bank Statement Loan: A bank statement loan might be the best choice if your income is consistently reflected in your bank deposits. This is ideal if you don’t have formal financial statements but can show steady cash flow through your personal or business bank accounts.
P&L Loan: If you have a well-maintained profit and loss statement that accurately shows your business’s revenues, expenses, and net profits, a P&L loan could be a good fit. If your income fluctuates from month to month or you reinvest heavily into your business, a P&L loan can better show the overall financial health of your business.
2. How Consistent Your Income Is
Bank Statement Loan: If you have a steady stream of deposits and your cash flow looks strong over the past 12-24 months, a bank statement loan could work well, as lenders focus on the consistency and number of deposits.
P&L Loan: If your income is seasonal or fluctuates heavily from month to month but your overall profits are solid, a P&L loan can give lenders a complete picture of your business’s profitability.
3. The Ease of Preparation
Bank Statement Loan: Bank statement loans require less formal preparation because you mainly provide bank statements. It may be a faster option if your business doesn’t have formalized financial statements.
P&L Loan: If you have or can easily prepare a profit and loss statement, this loan could be a good choice. Remember that some lenders may require the P&L to be prepared or verified by a CPA, which could take time and involve additional costs.
4. Your Control Over Your Expenses
Bank Statement Loan: This works if your bank deposits tell the whole story of your income, regardless of how you manage expenses.
P&L Loan: If you want to show lenders how you handle expenses concerning your income (which can sometimes help make a stronger case for profitability), a P&L loan provides more detailed information about both.
5. The Lender’s Preferences
Some lenders may prefer one type of loan over another based on your industry or income structure. Discuss your options with a lender and see which loan they will approve based on your financial situation.
10 Tips for Getting a Bank Statement or P&L Loan as a Small Business Owner
Getting approved for a bank statement or P&L loan can be challenging if you're a small business owner. Here are 10 helpful tips to improve your chances and make the process easier.
1. Provide All the Necessary Documentation.
Bank statement loans require bank statements, proof of business ownership, and credit reports, with an optional P&L statement.
P&L loans focus on the profit and loss statement (often CPA-verified) but may include a balance sheet, tax returns, bank statements, and proof of business ownership.
Lenders have slight variations in the documentation they request, so confirming their specific requirements is a good idea.
2. Maintain a Good Credit Score.
Aim for a credit score of 620 or higher to increase your chances of approval. The higher your credit score, the better the loan terms, including interest rates and down payment requirements.
FAQ: Can I get a bank statement or P&L loan with bad credit?
While obtaining a bank statement or P&L loan with bad credit is possible, it usually comes with higher interest rates, larger down payments, and stricter terms. Strong cash flow or business profitability can help reduce the risks associated with a lower credit score.
3. Separate Your Personal & Business Finances.
If possible, consider using separate bank accounts for personal and business transactions. Lenders prefer to see clear income streams for better evaluation.
4. Increase Your Cash Flow.
Make sure you regularly deposit money into your bank account to show that you have a steady and healthy cash flow. Lenders want to see that you have a reliable income, even if it's not from a traditional job.
5. Reduce Your Business Expenses.
If you’re applying for a P&L loan, try to minimize unnecessary expenses during the period your P&L statement covers. Lower expenses increase your net profit, which looks better to lenders.
6. Have a Solid Business Plan.
When applying for a loan using alternative income verification, it's important to show lenders that your business is stable. To reassure the lender, provide a business plan outlining how you generate income and manage expenses.
7. Save for a Higher Down Payment.
Prepare to put down a higher down payment, usually 10% to 20%, as bank statements and P&L loans often require larger down payments due to the risk involved.
FAQ: Can I get a bank statement or P&L loan with a 5% down payment?
No, a 5% down payment is generally not enough for a bank statement or P&L loan. These loans usually require 10% to 20% down, though specialized lenders may be more flexible in rare cases.
If you’re looking for a 5% down payment loan, you may want to consider conventional or FHA loans. However, these loan types will require traditional income verification, such as tax returns or pay stubs.
8. Work With a Lender Who Is Experienced in Non-Traditional Loans.
The best lenders for bank statement and P&L loans specialize in non-qualifying mortgage (non-QM) loans. They’ll better understand your financial situation and can offer more flexible terms than traditional lenders.
9. Be Prepared to Explain Your Business.
Be ready to explain your business model and income structure. Lenders may ask questions to understand how your business operates and how stable it is.
10. Consult With a CPA.
If you're applying for a P&L loan, consider having a CPA review or prepare your profit and loss statement. This will add credibility and can strengthen your application.
Small Business Owners: Partner with Mortgage Minds to Achieve Homeownership
Qualifying for a bank statement or P&L mortgage loan opens doors for small business owners who need flexible financing options. You can increase your chances of getting approved by preparing the proper documentation and working with a lender who understands your unique financial situation.
If you're ready to explore these loan options, contact us today for expert guidance and a free consultation to help you get the loan you need!
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