Write A Declining-Income Letter For A P&L Loan — The Quick Read: A declining-income letter explains why a self-employed borrower’s profit-and-loss statement shows lower net income than a prior year. It works alongside a CPA-prepared P&L, not instead of one. The strongest letters name a specific cause, show the decline has stopped, and attach documents that back up both claims. A vague letter with no supporting paperwork rarely moves an underwriter.
This matters because P&L loans qualify self-employed borrowers off business income rather than traditional personal-income documentation. That income naturally moves around year to year. When it drops, the file needs an explanation an underwriter can actually verify — not just a story.
Key Terms Defined
P&L loan — a mortgage that qualifies a self-employed borrower using a profit-and-loss statement instead of traditional personal-income documentation, usually prepared by a licensed tax professional.
CPA letter — a signed statement from the preparer confirming gross and net business income and explaining whether that income is stable, rising, or falling.
Letter of explanation (LOE) — a short, borrower-written statement that names the cause of an income change and states whether it’s a one-time event or an ongoing trend.
Expense ratio — the percentage of gross deposits an underwriter subtracts before counting income, used on bank-statement and P&L-based files instead of tax-return deductions.
Trend analysis — comparing income period over period (month to month, or year over year) to see whether a business is growing, holding steady, or declining.
Why Underwriters Flag a Declining P&L in the First Place
Underwriters aren’t looking for a perfect story. They’re asking two things: has the decline stopped, and why did it happen. Everything else in the letter serves those two questions. Non-QM and P&L programs sit outside agency guidelines, so there’s no single published percentage that triggers automatic denial. But the industry still uses a rough mental yardstick. FHA’s own manual-underwrite rule requires a downgrade when self-employment income drops more than 20% year over year (see the HUD Mortgagee Letter 2022-09). That figure is FHA-specific, not a non-QM rule, but underwriters across the industry treat it as the point where extra scrutiny kicks in.
On the softer end, trade-press underwriting commentary suggests declines under 10% often clear with nothing more than a short borrower explanation. Anything past that generally needs documentation, not just narrative, according to underwriting guidance from The Commonwealth Group.
Key Takeaways
- A decline is judged on two questions: has it stopped, and what caused it.
- The CPA letter and the borrower’s letter serve different jobs — don’t combine them into one document.
- Small declines (under roughly 10%) may need only a short explanation; larger ones need paper trails.
- Severe drops often get qualified off the lower, more recent year rather than an average of both years.
- P&L loans are a personal-income product. A rental purchase usually runs through a different structure entirely.
The Two Documents: CPA Letter vs. Your Own Letter
These are not the same thing, and mixing them up is the most common mistake on a declining-income file. The CPA letter states the numbers and the trend. The borrower’s letter states the reason and the outlook.
A CPA letter needs to do specific work: state gross and net business income, flag whether income is stable, rising, or falling, and give context for any meaningful swing. A generic, boilerplate version rarely satisfies an underwriter, because it doesn’t address the specific numbers on the file. Lendmire’s own breakdown of how a CPA letter sets net income walks through what a preparer needs to include.
The borrower’s own letter of explanation is different. It should name the specific cause — a lost client, a one-time equipment purchase, a slow quarter tied to a documented event — and state plainly whether that cause is likely to repeat. If income has already turned back up, say so and attach proof. Underwriting convention treats a documented, reversed decline as one of the strongest factors on the file.
Step-by-Step: Building the Letter
Step 1 — Pin down the exact numbers. State the prior period’s net income, the current period’s net income, and the percentage change. Underwriters are comparing periods anyway; giving them the math up front builds trust.
Step 2 — Name one clear cause. Pick the actual driver — not a vague phrase like “market conditions.” A lost contract, a client that moved in-house, a seasonal slowdown, storm damage, an equipment purchase that dented net income temporarily. Specificity is what separates a letter that works from one that doesn’t.
Step 3 — State whether it’s recurring or a one-off. This is the single biggest factor in how an underwriter treats the file. A one-time event with documentation behind it reads very differently than an ongoing slide.
Step 4 — Show the reversal, if there is one. Interim P&L pages, recent bank deposits, or a signed contract showing new business all help demonstrate the dip has already turned around.
Step 5 — Attach the paper trail. A letter with no supporting documents is just a claim. Interim financials, a signed CPA statement, a lost-contract notice, or an invoice showing the disruption all carry more weight than narrative alone.
Step 6 — Expect a transcript cross-check. Many files get compared against IRS records to confirm the reported numbers line up with what was actually filed, using authorization forms like the 4506-C process. A mismatch doesn’t automatically sink the file — amended returns and timing differences happen — but it does trigger a closer look, so it helps if the letter already explains any gap.
Common P&L Scenarios and How to Frame Them
Different causes call for different framing. Here’s how the same underlying facts read very differently depending on the story attached. A drop in net income raises a simple risk question: can this borrower keep affording the payment going forward? Federal rules require lenders to weigh current or reasonably expected income using reliable verification, which is why a letter alone rarely closes a file (per the CFPB Ability-to-Repay Summary).
| Scenario | What the letter should emphasize |
|---|---|
| Reinvested in the business (new equipment, hiring) | Gross revenue held or grew; net dipped from planned spending, not lost demand |
| Lost a major client or contract | Cause is one-time; new business already replacing the gap, with proof |
| Seasonal dip | Pattern is normal for the industry; year-to-date or trailing months show recovery |
| Expense spike (repairs, one-time legal cost) | Isolated, non-recurring cost; underlying revenue unaffected |
| Broad slowdown tied to a documented event | Event is identifiable and over; income has since stabilized |
Reinvestment stories tend to underwrite better than “the business slowed down” stories, because reinvestment implies a choice, not a weakness. A borrower who bought equipment or hired staff to grow — and can show gross revenue held steady — is telling a very different story than one whose actual demand dropped.
Across the files this kind of situation shows up on, the letters that hold up share one habit: they lead with the number, not the excuse. “Net income declined roughly 14% from the prior year” reads stronger up front than three paragraphs of context before the reader ever sees the figure. Underwriters are comparing numbers against a threshold in their head; giving them that number first saves a round of back-and-forth.
What Can Go Wrong
A weak letter usually fails in one of a few predictable ways. Vague language — “the market was tough” — with nothing specific behind it rarely satisfies review. A template pulled from the internet, with no numbers filled in, reads as exactly that. Blaming the decline without acknowledging it or explaining what’s changed leaves the underwriter with an open question instead of a closed one.
Severe drops carry their own risk regardless of how well the letter is written. When income falls sharply — say a business earned meaningfully less in the second year than the first — most underwriting practice won’t simply average the two years together. The file typically gets sized off the lower, more recent figure, or a shorter and more current income window gets used instead. A great letter can support a borrower’s case, but it can’t force averaging when the drop is large enough to raise real doubt about ongoing capacity to earn at the higher level.
There’s also a documentation trap: a CPA-prepared P&L generally needs to be current, and stale documents create their own questions separate from the income trend itself. Keeping the P&L, the CPA letter, and the borrower’s letter aligned on the same numbers — not slightly different figures in each document — avoids an easy, avoidable red flag.
How the Income Actually Gets Calculated
On bank-statement and P&L-based files, qualifying income generally isn’t the number on the P&L’s bottom line taken at face value. It’s eligible deposits (or reported business income) run through an expense ratio first. Across the programs Lendmire places files with, that ratio typically runs 20% for a service business with no employees, 40% for a business with one to five employees, 50% for six or more employees or any product-based business, or an accountant-provided ratio specific to that business — with a P&L-based method generally capped around 80%. Transfers the borrower moves from their own business account into a personal account typically count in full.
That mechanic matters directly for a declining-income letter. If a business shows lower gross revenue but the expense ratio applied to it stays the same, net qualifying income falls in direct proportion — which is exactly the kind of trend an underwriter is watching for. Lendmire’s breakdown of how the expense ratio and CPA letter shape P&L income covers how that ratio gets selected on a given file.
Documentation on these programs is typically built around 12 or 24 consecutive months of statements, and business accounts generally need at least 25% ownership to qualify. Credit floors on the wholesale programs Lendmire works with typically start around 660, moving to roughly 700 on larger balances above the super-jumbo threshold, subject to full underwriting on every file. None of these are universal figures — they’re typical ranges across the wholesale network, and every file gets reviewed on its own facts.
Who This Fits — and Who It Doesn’t
A declining-income letter matters most for a borrower whose personal income is actually part of the qualifying math: a primary-residence purchase, a second-home purchase, or a refinance where the lender is reviewing the borrower’s business trend directly. It matters far less, or not at all, for an investor buying a straight rental property.
That’s a distinction worth sitting with. P&L loans are generally built for owner-occupied or personal qualification, not for financing a rental. An investor purchasing or refinancing an income property typically runs through a DSCR loan instead — a program that qualifies primarily on the property’s own rental income covering the payment, subject to lender guidelines, rather than the borrower’s personal tax or business income trend. Lendmire’s complete DSCR loans guide — actually, see Lendmire’s complete DSCR loans guide — walks through how that qualification path works for investors who’d rather sidestep the personal-income conversation entirely.
For a self-employed borrower with a genuine, temporary dip, the letter is a tool worth using — it can meaningfully strengthen a file when it’s specific and backed by documents. For a borrower whose income has been declining for multiple consecutive years with no clear reversal, no letter fixes that; the more honest move is often waiting for a stronger qualifying period, or exploring an asset-based path where liquid assets — divided across a set number of months, typically 36, 60, or 84 depending on the program and loan size — support qualification instead of earned income.
Where declining income runs alongside larger loan sizes, every wholesale program Lendmire works with reviews files above roughly $4,000,000 case by case before submission, regardless of how strong the letter is. Program parameters here — sizing, leverage, and reserves — apply through select lenders in Lendmire’s wholesale network and are never a guarantee of approval; every file still goes through full underwriting.
This isn’t legal or tax advice, and mortgage program terms shift regularly. Anyone weighing a specific letter, income scenario, or loan structure should talk it through with a qualified mortgage professional, and consult a CPA or attorney on anything touching their own tax or legal situation.
Frequently Asked Questions
Should I mention a declining year before the lender asks?
Yes. Getting ahead of it with a clear letter and supporting documents up front generally moves faster through underwriting than waiting for a condition to come back asking for one. Proactive framing also lets the borrower control the narrative instead of reacting to an underwriter’s assumptions.
Can I just say “business was slow” without more detail?
No — that phrase alone rarely satisfies review. Underwriters want a specific, identifiable cause: a named client loss, a documented event, a seasonal pattern tied to the industry. Vague language without a paper trail behind it is one of the most common reasons a letter gets sent back for more.
What if income declined two years in a row?
A single down year with a clear one-time cause reads very differently than two consecutive declines. Two years running usually shifts the underwriter’s read from “temporary dip” toward “ongoing trend,” and at that point documentation of a genuine turnaround — recent months, new contracts, current deposits — carries more weight than the letter itself.
Does a declining-income letter matter for a DSCR loan on a rental property?
Generally, no. DSCR loans qualify primarily on the property’s rental income covering the payment, subject to lender guidelines, rather than the borrower’s personal business trend. A declining-income letter typically only becomes relevant if that same investor is also being qualified on personal income for a different property, such as a primary residence.
What if the decline was due to reinvesting in the business, not losing revenue?
That’s usually one of the stronger stories to tell, since it implies the business grew rather than weakened. Showing that gross revenue held steady while net income dipped from planned spending — new equipment, added staff — tends to underwrite more favorably than a story built around lost demand.
This article is for general information only and is not legal or tax advice. Program details, income-calculation methods, and underwriting requirements vary by lender and change over time; readers should confirm current guidelines with a qualified mortgage professional and speak with a CPA or attorney about their own tax or legal situation.
For current guidelines and terms, see Lendmire’s super jumbo bank statement loan programs page.
About Lendmire
Lendmire (NMLS# 2371349) is a DSCR-focused mortgage broker that helps arrange investor financing across 40 markets, including Washington, D.C., through wholesale and investor-lending channels. DSCR eligibility is generally reviewed by the lender around the property’s rental income rather than personal income documentation, subject to lender guidelines — which works for self-employed investors, LLC operators, and portfolios above four financed properties. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. HUD Mortgagee Letter 2022-09
2. The Commonwealth Group — Declining Income Underwriting
3. Homebuyer.com — Form 4506-C Requirements and Uses
4. CFPB Ability-to-Repay Summary
Brandon Miller
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Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.
