Why You Need a CPA Letter For Stated Income & Bank Statement Mortgages

As a self-employed person, have you ever wondered how other self-employed individuals or business owners secure mortgages without traditional pay stubs or W-2 forms?

The answer lies in a little-known but important document called a CPA letter. This letter can mean the difference between approval and denial for unconventional borrowers. What exactly is a CPA letter, and why do lenders place so much importance on it?

Let’s find out about its pivotal role in bank statements and stated income mortgages.

What Is a CPA Letter?

A CPA letter is an official document written by a Certified Public Accountant (CPA) that verifies specific financial details about an individual or business. The letter typically includes the following:

• Verification of income: The CPA provides an estimate of the borrower’s annual income based on their records. CPAs verify the applicant's income against tax documents and other financial data. The CPA letter includes detailed financial data to provide clarity and context.

• Employment status: Confirmation of self-employment or business ownership.

• Business details: Information about the nature of the business, its operational history, and financial stability.

This letter serves as a trusted attestation of a borrower’s financial standing, reassuring lenders about the applicant’s ability to repay the loan.

Key Components of a CPA Letter

A CPA letter typically includes several key components that collectively affirm an individual’s or entity’s financial status. Here are the essential parts generally included in the letter:

1. Introduction: The letter begins with a brief introduction that outlines its purpose, identifies the requester, and describes the scope of work performed by the CPA. This sets the context for the detailed financial information that follows.

2. Verification of Financial Information: The CPA provides a statement confirming the accuracy and authenticity of the financial information presented. This includes verifying income, expenses, and financial statements, ensuring that the data is reliable and trustworthy.

3. Financial Statement Analysis: The letter includes an analysis of the financial statements, such as balance sheets, income statements, and cash flow statements. This analysis offers a comprehensive understanding of the individual’s or entity’s financial position, highlighting key financial metrics and trends.

4. Income Verification: A critical component of the letter is the verification of the applicant’s income. The CPA reviews tax returns, pay stubs, and other relevant documentation to confirm the income figures provided, ensuring they are accurate and consistent.

5. Financial Status: The CPA assesses and confirms the individual’s or entity’s financial status, including their creditworthiness, financial stability, and ability to meet financial obligations. This assessment provides lenders with confidence in the borrower’s financial health.

6. Certification: The CPA certifies that the financial information provided is accurate, complete, and compliant with relevant financial reporting standards. This certification adds a layer of credibility and assurance for the lenders.

7. Conclusion: The letter concludes with a summary of the findings and conclusions drawn from the analysis. It may also include any recommendations or observations that could be relevant to the lender’s decision-making process.

CPA Letter for Bank Statements Mortgages:

Bank statement mortgages are designed for self-employed borrowers or individuals with irregular income streams. Instead of relying on traditional income documentation like W-2s or pay stubs, these loans use bank statements to determine income. However, bank statements alone may not provide a complete picture of a borrower’s financial health for financial institutions.

A CPA letter complements bank statements by confirming income consistency and business stability. This added verification helps lenders assess risk more accurately and ensures the borrower meets the loan’s underwriting criteria. An income verification letter from a CPA is crucial for providing third-party validation of the borrower's income.

CPA Letter Stated Income Mortgages:

Stated income mortgages cater to borrowers who cannot fully document their income but can demonstrate their ability to repay through other means. Since these loans rely on the borrower’s stated income without extensive documentation, lenders require additional evidence to validate the claims.

A CPA letter plays a vital role in this scenario by providing:

• Third-party verification: The CPA’s professional assessment in the verification letter lends credibility to the borrower’s stated income.

• Financial transparency: The letter often includes a breakdown of income sources and business expenses, giving lenders a clearer understanding of the borrower’s financial situation. The CPA also reviews the most recent tax return to ensure accurate income reporting.

• Compliance assurance: It ensures that the loan aligns with legal and financial standards.

How to Obtain a CPA Letter

Obtaining a CPA letter involves several steps, each crucial to ensuring the letter accurately reflects your financial situation:

1. Engage a CPA: Start by identifying a certified public accountant who is familiar with your finances and has experience in preparing CPA letters. A well-qualified CPA will understand the specific requirements and nuances of these letters.

2. Gather Required Documents: Collect all necessary financial documents, including tax returns, financial statements, pay stubs, and bank statements. Having these documents ready will facilitate a smoother and quicker review process.

3. Provide Information: Share all relevant information with the CPA, including your financial goals, income, expenses, and financial obligations. The more comprehensive the information you provide, the more accurate and detailed the CPA letter will be.

4. CPA Review and Analysis: The CPA will review and analyze your financial information, including your financial statements, tax returns, and other relevant documentation. This thorough analysis is essential for creating an accurate and reliable CPA letter.

5. Drafting the Letter: Based on the review and analysis, the CPA will draft the letter, incorporating all necessary components such as the introduction, verification of financial information, financial statement analysis, income verification, financial status, certification, and conclusion.

6. Review and Approval: Carefully review the draft letter to ensure all information is accurate and complete. Once you are satisfied with the content, approve the letter for finalization.

7. Finalize the Letter: The CPA will finalize the letter, including signing and dating it, and provide it to you for submission to the requesting party.

Note: The cost of a CPA letter can vary depending on the complexity of the financial information, the CPA’s experience, and the location. On average, the cost of a CPA letter can range from $500 to $2,000 or more.

Key Benefits of a CPA Letter

A CPA letter offers several advantages to both borrowers and lenders:

1. Enhanced credibility: It demonstrates that a qualified professional has reviewed the borrower’s financial information, including profit and loss statements.

2. Streamlined approval: Providing detailed income verification expedites the loan approval process.

3. Risk mitigation: Lenders gain confidence in the borrower’s ability to repay, reducing the likelihood of loan default. Verification letters, including income verification letters, play a critical role in the loan approval process.

Conclusion

For self-employed individuals or those with unconventional income sources, securing a bank statement or stated income mortgage can be challenging without proper documentation. A CPA letter bridges this gap by providing a reliable, professional verification of income and financial stability. Offering a clear picture of the borrower’s financial health plays a crucial role in ensuring loan approval and fostering trust between borrowers and lenders.