Bank statements instead of tax returns

The short version

For self-employed borrowers, tax returns after legitimate business write-offs can understate the cash the business actually brings in. Some loans document income another way.

Bank-statement loans document income with bank statements instead of tax returns. Profit-and-loss loans use a profit-and-loss statement. I place both in Georgia and Florida.

The usual way, and the alternative

For most loans, a self-employed borrower's income comes from recent tax returns, after business expenses. Bank-statement and P&L loans are an alternative when the returns understate what the business brings in. Which fits depends on the returns, the business and the lender's review.

How a bank-statement loan looks at income

Instead of the income on a tax return, the lender looks at deposits over a period of time, and generally applies an expense allowance for the cost of running the business. It also asks for proof that the business exists, such as a letter from a CPA or a business license.

How a profit-and-loss loan works

A P&L loan uses a profit-and-loss statement for the business. Who prepares the statement, and what else is asked for alongside it, varies by lender.

What these loans aren't

They aren't "no-doc" loans, and they don't skip verification. They're Non-QM loans, outside the standard agency guidelines, and the lender still has to make a reasonable, good-faith determination that the borrower can repay. The documentation is different, not absent.

Credit, assets and the property are reviewed too, and each lender sets its own standards.

A word on taxes

How a business reports its income is a question for a tax professional, not for a loan. I don't give tax advice.

From the source

The CFPB explains the rule that requires a lender to check that a borrower can repay:

• CFPB: What is the ability-to-repay rule?