Loan Officer Training - How to Structure Profit & Loss Loans

In this essential episode of Loan Officer Training, we tackle one of the most complex aspects of lending—structuring Profit & Loss (P&L) loans. If you’re working with self-employed borrowers or those with variable income, mastering P&L loans is a must.

Join us as we break down the key components of P&L statements, discuss how to accurately assess income stability, and explore the best strategies for structuring these loans to meet your clients' needs. Packed with expert tips, real-world examples, and actionable insights, this episode will equip you with the knowledge to confidently navigate the P&L loan landscape.

Whether you’re a seasoned loan officer or just starting out, this episode is your go-to guide for mastering P&L loans and helping your clients secure the financing they need.

Tune in and take your loan structuring skills to the next level!

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About The Mortgage Calculator:

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation such as Bank Statement Mortgages, P&L Mortgages, Asset Based Mortgage Programs, No Ratio CDFI Loan Program

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Sep 03, 2024 • 11:04:18 PM: 0:13

So welcome, everyone. My name is Kyle Hiersche. I'm the COO of the Mortgage Calculator joined here by our President Nick Hiersche and our CSO Jose Gonzalez. We are a lender that specializes in non QM loans. And what we do every Tuesday, Wednesday and Thursday evening at 7pm Eastern is our loan officer training where we go over new training topic. And tonight is something we're very familiar with here because we specialize in non QM loans, which is the profit and loss I will go ahead and turn it over to Jose. I know he has a presentation ready. So let's go ahead and get into it. Good evening, everybody. Thank you for joining us for tonight's training on how to structure a profit and loss loan. This is one of my favorite ones because this is really one of the ones that makes the investors heads spin. been, right? Because it's a pretty easy loan long as you have an accountant that can provide the necessary documents. And now in some cases we have options for self prepared P& Ls, but they still need some kind of third party verification from the tax preparer. Now keep in mind when in this presentation, if you see the word self prepared, CPA, anywhere that can be interchanged, uh, by accountant or tax preparer, because for this, uh, for this loan product, it can usually be any of the three, unless the guidelines specifically stipulate that it needs to be. a CPA in that they're not just using the word CPA instead of saying tax preparer or accountant. Now, as you would figure, this program is for self employed borrowers only. However, we do have options like we do with all of our non QM options that can combine the income types. So you can have a borrower qualifying under a profit and loss, program that can also add W 2 bank statement loan or asset utilization, for example, as may be applicable. So if they're self employed but they also have a W 2 job, they can qualify using both incomes as long as they are separate. Incomes. So what do we mean by a profit and loss loan? Well, a profit and loss loan is a loan that uses an unaudited, and notice I have that in bold type, unaudited profit and loss report to qualify the borrower. This is very important because it does not have to be an audited report, which is about the same as a income tax return. It is an unaudited report, which is basically an Income and expense compilation. Now, depending on the guidelines that you're reviewing for the option chosen, as previously stated, the P& L can be prepared by a licensed CPA. an accountant or an active status enrolled tax agent that has a PTIN, right? That's their tax prepare identification number. Again, be sure to confirm if the option you have selected actually requires a report to be completed by a CTA. If it is a self prepared report by the borrower, assuming that the guidelines that you are reviewing for that option do allow that, it will need to be accompanied by a third party verification letter from the tax preparer. Usually it's more of a business narrative And states that the accountant has prepared the tax returns for the previous two years or whatever may be the case one year If it's a one year option for the borrower Now keep in mind most Options do require anywhere from two to three months business bank statements to verify the business activity, you know, the income, gross income, and the expenses. Now there are options that do not require bank statements. Most do. So please do make sure that you review the guidelines. To ensure what is required regarding the bank statements, because if the reason you're using P& L is because a borrower has a lot of overdrafts, and now they require you to provide the last two months bank statements, and they have overdrafts, Your deal is going to be in jeopardy. Now, what are some of the eligible borrowers and transaction types? Well, like stated, uh, this program is for self employed borrowers only. Most guidelines require the borrower to own at least 25 percent of the business. That seems to be the threshold of in most instances to confirm that you are an actual business owner. Usually owning less than 25 percent of the business will not consider you a business owner or at least self employed in that matter. Again, remember that all program options in non QM have their own guidelines that are going to be specific to that investor. Investor. I'm speaking about the company buying the loans, not your investor who you're making a loan to. So our eligible borrowers here would be us citizens, permanent resident aliens, non permanent resident aliens, obviously with us credit. And if they're a non permanent resident alien, they're also going to have authorization as well for this program. First time home buyers are okay. However, real important to know. This program is not possible for foreign nationals because due to the nature of this program, they have to have U. S. based employment, right? They have to have, uh, their, their business. which is generating income for them. So a P& L program would not be possible. The only scenario where you could have sort of a foreign national, uh, qualifying for this is if, for example, they have the E 2 visa, which is a visa usually grants them five years here in the U. S. It's a, it's a business owner visa. Basically you invest in a business, And they give you the E 2 visa, which gives you the right to operate your business. And they, and they give you, um, a tax ID number. Also, they'll even give you a social security number with it. Uh, which as long as you have the E 2 visa is valid, and then you can apply for U. S. based credit, right? So that, that would be their non permanent resident alien. That's no longer a foreign national, right? They have the E 2 visa, which gives them status. But if they're a true foreign national, they're not going to have the U. S. based business here. So there's no way that they would have a profit and loss that would be acceptable from their country. It is possible for primary second home investments, uh, first mortgage, and we actually do have second mortgage he loan. Options. That's our fixed rate, fully amortizing second mortgage. And those, uh, are offered with a profit and loss option for the income type, just like we have DSCR. And we also have bank statement and full doc for the helos max is 90%. LTV for an owner occupied purchase. 85 percent LTV for an investment purchase. Now, what are some of the issues where a profit and loss loan can assist? What are they a workaround for? Well, the first one is pretty obvious. It's a good option where tax returns do not fully capture the cash flow for the business, right? You know how that goes, uh, too many write offs. Now, normally for this type of a scenario, uh, the first option people immediately think about is a bank statement loan, which is a good option. And remember, 1099 could be an option also if they receive 1099s. If they don't receive 1099s, then the bank statement option is usually going to be better than the P& L option, simply because, uh, There's more liquidity in secondary regarding bank statement loans, which means you're probably going to have more investors offering it and you're going to have more competition, which means you're going to have lower rates and or less expensive cost to the rate, right? Maybe even higher LTVs. So, if, however, the P& L is the perfect solution for a bank statement loan gone sour because of, for example, declining deposit trends, too many NSFs, too many overdrafts, unverifiable large deposits or declining or low ending balance. By the way, this is usually the reason why you would only look back 12 months. on a bank statement loan versus 24 months, even though 24 months will give you usually a little bit lower cost to the loan, to the interest rate, but you're exposing when you have the 24 month look back period, instead of 12, you're exposing yourself to some of these issues like the declining trends, right? If in the previous 12 months, the deposits were higher than in the current 12 months. you have an issue. So when you are analyzing those, uh, please keep an eye out on using 12 months instead of 24 or using the P and L as an option. If it's just not going to pass the, any of these, uh, tests, right? Declining deposits and assess overdrafts on verifiable large deposits or declining or low ending balance. So let's talk a little bit now about the actual income calculating, although frankly, there is no real income calculation that you're going to do per se, you're going to look at the profit and loss report that's prepared and provided to you, which is going to have gross revenue or the gross income is going to have the expenses. And then it's going to have the net income and that net income divided by however many months have elapsed or if it's a 12 month report because it all depends if you've got a year to date report plus a previous 12 months or you're just going straight 12 months from today going back. Uh, so you're just going to look at the net income and that's going to be the income and then you divide by 12 and that's going to be your monthly income. Make sure you review the report and that it is correct before turning it in. There may be some mistakes or maybe some typos. The income may not add up. In which case you may want to reach back out to the borrower and have them contact their account and make sure that they got it right and they didn't, uh, you know, click on the wrong, the wrong button and give you the wrong amount, right? But what are some of the points to consider? Uh, when reviewing the P& L report or when even asking for the P& L report, the first is the most important. The business needs to have existed for at least two years, that's 24 months. But there are options for less, for 12 to less than 24 months, if Number one, the borrower's previous employment is verified to be in a field that provides the same products or services. For example, you were working as a licensed electrician for a company and now you're a licensed electrician on your own, or you were a doctor, which is also another job, uh, for a hospital. And now You're a doctor, uh, receiving, uh, a 1099, for example, from that hospital. I mean, you'd probably do a 1099 loan there, possibly, but P& L is still an option. You know, or any other type of job where you're doing similar duties as a W 2 employee, and now you're doing it self employed, right? Similar responsibilities as in the current business. Now keep in mind, and again this is where you have to read the guidelines and review, keep in mind that some options allow combining profit and loss reports from two separate companies. Keep in mind, these companies have to exist for the amount of time needed. Now, however, I actually had the situation where they had one company, Company A, but then they moved from New York to Florida and they had to start another company. In Florida, they had to do an LLC for Florida when they wanted to, for whatever reason that they needed to do it. So now in essence, we have one company that was, I think it was like 13 or 14 months existence. And then we have the new company that I think was like 10 or 11 months existence between the two companies, we have the 24 months, they were the same type of business and automobile dealership. Online type brokerage, right? Auto broker. But due to the fact that it was the same business, it was even the same name. They just changed like the end of the name, but it was even the same name. So that one was pretty easy. We were, we were able to show between the two separate operating agreements. that the two entities were actually the same business, just one stopped operating in New York and the other one started operating in Florida. So no problem there for the two P& Ls from the separate companies, but you can actually have them from companies that are running concurrently, right? They've all both been around two years or more. However, you need the income from both to qualify because of the structure the borrower has for their businesses. That would be totally fine. Now, keep in mind Uh, that the expenses that are on the profit and loss report need to make sense for the type of business, right? Underwriters know, uh, business is how they operate. If it's a service related business, they're going to look at it one way. But if it's a product related business, like for example, a retail store, a convenience store, they know there's a lot more overhead and a lot more expenses for that type of business. And if you're running a business out of your house, Uh, online type business where you have very little overhead, no employees, it's just you. Uh, so, you know, you're probably going to have some variable expenses there, but hardly no fixed expenses. So, they do look at that and it has to make sense. Uh, the P& L needs to cover the last 12 months most recent consecutive calendar months or last 12 months fiscal year plus a year to date. To confirm no decrease. So again, you would probably want to look at the guidelines for the option that you're choosing to see if they require the last complete 12 months fiscal year, plus then the year to date, or if they can let you go. From today 12 months back and just do it that way capture a month to month activity rather than The fiscal year plus year to date That's really important to know because you don't want to ask for the wrong report Then find out after the file goes back from underwriting that the report you turned it was useless Because it only provided half of the information Now for options requiring professionally prepared reports, right, you have to be aware of that. Uh, be, just be aware that the, uh, CPA tax repair or the enrolled agent needs to certify that, you know, in the letter they have to write that they have prepared the borrower's most recent tax return. If you're using a one year P& L, the borrower's most recent, uh, 22 and 23 tax returns if you're using the two year. P& L. Keep in mind also that the CPA or tax preparer needs to prepare a letter on letterhead to actually provide to P& L. One thing is the cover letter that they're going to provide, which is going to be like a business narrative. And the other one is actually the P& L on their letterhead. For either the 12 or 24 months period that you're looking for. And now last but not least, I wanted to go over, this is a sample guideline here, just so that you can understand how they are all different. Now, this happens to be a sample guideline from one of our investors, but you will see how they pretty, how it's pretty cut and dry, how they stipulate here that it has to be from a licensed CPA, a certified CPA. CTEC registered tax preparer or IRS enrolled tax agent. The licensed CPA will have a license and the other two will have some type of PTIN number, some type of registration number that you can usually verify from, from a portal. Like IRS, for example, has a portal. Now you can verify all of the IRS enrolled tax agents. It's pretty easy. Just go to the portal, enter the information that comes up, take a screenshot of it, and you've met the requirement for verifying the PTIN for the tax preparer. Uh, notice how this one states that the PLA needs to be strict strictly the 12 months most recent calendar months. Or all separated out by years and year to date. It's one or the other, right? You're either going to give them 12 months out, or you're going to give them the last full year plus current year to date, right? So, I mean, I don't know what would be the reason why you would want to give a full fiscal year plus current year to date. But if there's any financial reason when reviewing the reports, maybe that's the reason why. Otherwise you're just complicating yourself. Now notice here how they give you a couple of different portals where you can verify the C tech. Registered Tax Preparer, the CPAA license, the IRS PTIN for the tax preparer. Those, those are all pretty cool links. I suggest you use them. Um, and then notice the additional details that they provide there. When it tells you strictly here, they say with a combined loan to value greater than 65%. They need two months of consecutive personal or business bank statements. The most recent statement dated within 120 days of the note date. That's the date of closing. And, uh, notice it says they're also very important total deposits reflected on the bank statement minus any inconsistent deposits or deposits unrelated to business activity must support at least 75 percent. Of the gross income reflected on the P& L. They're giving you a 25 percent margin there to deviation and the P& L period must be consistent with the bank statement periods. If bank statements do not support the income provided reported on the P& L statement, the underwriter has a right to request additional months of bank statements to verify the income on the P& L. This is acceptable in cases in the age of the business implies such a situation no more than three NSFs allowed. So you got to read into the guidelines and make sure that you don't get caught off guard. And that last bullet point covers the 24 months or in scenarios where they'll accept less than 24 months. I think I already covered that in the bullet points. I just wanted to show you how it looks in the guidelines. So again, you get used to the habit. Of reviewing the guidelines and realizing that these guidelines are specific to the investor just earlier today, had an MLO come into the zoom room asking me about first time investors and DSCR loans and asking it in a general question, like, you know, as if it was applicable for all DSCR loans. And I had to read it again. That, um, non QM loans, uh, the guidelines are specific to each investor. So she would have to see which are the options under consideration, access the guidelines and the matrices for those options, read them and see which is the one that is most favorable to the borrower, very important because not any two guidelines are the same for non QM. All right. Thank you, Jose. I don't see any questions, so I think we can go ahead and wrap it up. Remember that we do this every Tuesday, Wednesday, Thursday evening at 7 p. m. Eastern, where we go through a new loan officer training. So we will see you all tomorrow, 7 p. m. Eastern for the next episode of the Loan Officer Training Series with the Mortgage Calculator. Have a great.