An Introduction to Profit and Loss Statements and Balance Sheets
For this blog update, we’ll be going into detail about Profit and Loss Statements, Balance Sheets, the differences between them, and when the first time home buyer will be needing them for the home buying process. Profit and Loss Statements as well as Balance Sheets are only a part of the mortgage lending process if the borrower has a business that they own.
Profit And Loss Statements: Explained
Profit and Loss Statements are financial statements that may also be called an income statement. Profit and Loss statements shows the revenue, the cost, and the expenditures during a specific period of time. A profit and loss statement is usually an annual statement, but it can also be semi-annual, or even quarterly statements. For a first time home buyer who is interested in a home loan, most lenders will require the most recent annual statement. The underwriter looks at the profit and loss statement for a first time home buyer to see the “economical feasibility” of a company. This includes information about a company’s ability to generate income, as well as giving the underwriter an idea of the expenditures of a company. If a profit and loss statement for 2017 is asked for, for example, that information needs to match the information on a Tax Return for that same year. The first time home buyer, if they do not receive W-2 forms from an employer, will need to have the profit and loss statement be checked to make sure that it matches the tax returns. This way, the underwriter can see if any taxes are owed, check if they have the tax payment plan or confirmation, or ask the first time borrower for that tax documentation.
Balance Sheets: How Are They Different?
Balance Sheets are very similar to Profit and Loss statements. Balance Sheets report a company’s assets and resources. For bigger companies that have shareholders that invest in the equity of the company, this information would also be on this balance sheet. The Balance sheet is a current year-to-date summary or snapshot of a company’s current financial capabilities. This information is current, so there’s nothing to really compare this information to, besides the bank statements showing the flow of money. If the first time home buyer has a specific bank statement for his or her business, this statement would need to be sent in. Any deposits that are from this account going into the first time home buyer’s regular bank account will only need to be explained.
The Balance Sheet and current Profit and Loss Statements can both be asked for by the underwriter. As a reminder, the Profit and Loss Statement can also be year-to-date, as long as it shows all of the expenditures, income, and costs of a business in that current year. If a borrower has a very basic company that they own, without any investors and equity from shareholders, they can usually just submit the Profit and Loss Statement, along with the most recent two years of Tax Returns to show self-employment income to the underwriter.
For the next blog update, we will be talking about Tax Returns, and why a first time home buyer will need to submit them for the home loan program.