If you own your own business and you’ve had a mortgage lender ask for a mortgage comfort letter from your CPA? You need to proceed cautiously.
The reason? Often, these letters ask your CPA or CPA firm to either break state accountancy law. Or require your CPA to violate professional standards.
Are you self-employed or have nontraditional income sources and need to verify your income for a home mortgage? Getting a CPA letter can help strengthen your loan application when you don’t have a W-2 to document your earnings
CPA letters are issued by certified public accountants to validate key financial information for lenders and other third parties. If you’re thinking about applying for a mortgage soon, understanding these letters can help you get prepared.
What is a CPA Letter for a Mortgage?
A CPA letter for a mortgage is a document prepared by your accountant that validates your income and ability to repay a home loan. It’s also called an income verification letter
Lenders require these letters when borrowers have unconventional income sources that can’t be easily documented with tax returns and pay stubs. This includes self-employed borrowers, independent contractors, freelancers, seasonal workers and those with rental property or investment income.
The CPA letter serves as a supplement to your tax returns to convince lenders you have steady earnings. The CPA verifies your income streams and confirms your ability to make regular mortgage payments.
Why Lenders Require CPA Letters
Lenders want to mitigate risk when underwriting loans. They verify income and employment to ensure borrowers can afford the monthly mortgage payment.
For traditional W-2 employees, lenders can pull pay stubs and tax returns. But for non-traditional income sources, more validation is required.
Reasons lenders ask for CPA letters include:
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Insufficient tax return history – If you haven’t been self-employed long enough to have 2 years of returns.
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Tax returns don’t show full income – If deductions lower your net income on paper.
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Income fluctuations – If your earnings vary year-to-year.
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Rental or investment income – Extra income sources that need validating.
Having a CPA vouch for your finances provides assurances when tax documents alone can’t paint a full picture.
When Do You Need a CPA Letter?
Lenders have different requirements on when to provide a CPA letter. Common scenarios include:
- You’ve been self-employed less than 2 years
- You’re a freelancer or independent contractor
- You have rental properties that supplement your income
- Your income varied 20% or more over the last 2 years
- You claim large deductions that reduce your net income
- You have commission-based earnings
Talk to your loan officer to see if your situation warrants submitting a CPA letter. It’s better to be overprepared with income verification to avoid issues.
What to Include in a CPA Letter
While contents can vary, most CPA letters include these key pieces of information:
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Header – The CPA’s letterhead with name, firm, address and contact details
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Date issued – The exact date the CPA signed and issued the letter
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Borrower information – Your full name and address
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Employment details – Your occupation, employer name, years on the job
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Income verification – Your base salary, hourly pay or net business income
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Additional income – Other earnings like bonuses, commissions, or rental income
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CPA qualifications – How long they’ve prepared your taxes
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Signature – Handwritten signature of the licensed CPA
Work with your CPA to ensure they include all required income sources and meet your lender’s guidelines.
How Far Back Should CPA Verify Income?
Many lenders require CPAs to verify your income for the last two years at minimum. Some may request additional history.
Self-employed borrowers should get income verified for however long they’ve been in business if it’s been less than two years. Having a longer history is better when possible.
Ask your loan officer how many years of income verification they need to assess your loan application fairly and completely.
Who Can Prepare a CPA Letter?
A CPA letter must come directly from a certified public accountant. They sign and issue the document on their letterhead.
You can request an income verification letter from the CPA who prepares your business or personal taxes. If you don’t have an existing relationship with a CPA, you can hire one just for this purpose.
Online services like CPALetter.com also provide letters from their network of CPAs. Fees range from $250 to $750.
How to Get a CPA Letter for Mortgage Preapproval
Getting a CPA letter in advance can make your mortgage preapproval go smoother. Here are some tips:
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Find a qualified CPA – Search online and ask your lender for recommendations. Make sure they have mortgage verification experience.
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Gather required documents – Have several years of tax returns, bank statements and financial statements ready.
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Discuss your situation – Explain your income sources and employment details so they can tailor the letter.
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Confirm timeline – Verify when you need the letter to coincide with your preapproval application.
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Review carefully – Ensure the letter includes everything required by your lender when you receive the final draft.
Having a preapproved mortgage shows sellers you’re qualified to finance the home purchase. A strong CPA letter can help get you favorable preapproval terms.
Can a Mortgage Lender Reject a CPA Letter?
Lenders can reject CPA letters if they find areas of concern or inconsistencies. Some reasons a lender may not accept a letter include:
- Income claims don’t match tax return figures
- Too much variance in income from year to year
- Insufficient history of self-employment
- CPA is not properly licensed
- CPA has limited experience validating mortgage income
Work closely with your accountant and loan officer to ensure your CPA letter checks all the boxes required for lender approval.
Alternatives to a CPA Letter for Mortgage
If getting a CPA letter doesn’t make sense for your situation, discuss alternatives with your lender such as:
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12 months of bank statements – To show regular income deposits
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1099s – If you’re an independent contractor
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24 months of financial statements – To show long-term income history
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Letter of explanation – If earnings fluctuate or you have deductions
See which substitutes your lender will accept in lieu of a formal CPA letter.
Sample CPA Letter for Mortgage Income Verification
CPA letters follow a standard format outlined by lenders. Here’s an example:
January 5, 2023
To Whom It May Concern:
I have prepared the federal individual and business tax returns for Jane Doe for tax years 2018-2022. During that period her income has been consistent from self-employment as a marketing consultant doing business as Doe Marketing.
Based on Jane Doe’s personal and business tax returns, her self-employment income has averaged $102,000 annually for tax years 2018-2022, verified via the attached schedule summarizing her net income per those federal individual and business tax returns. Her self-employment income in 2022 was $118,000.
Please contact me directly if you have any other questions regarding Jane Doe’s income.
Sincerely,
[CPA name and signature]
Certified Public Accountant
[Contact information]
Get Your CPA Letter Done Right
A strong CPA letter can give your mortgage application an advantage, especially when you have nontraditional income sources. Follow the tips above to ensure your letter includes everything lenders want to see so you can get home loan approval with minimal hassle. Reach out to a qualified CPA early on and provide them what they need to verify your income accurately.
What CPA or CPA Firm Can Supply
Here’s the problem with mortgage comfort letters. Often, what the lender wants is assurance. And the rub there? Federal and state laws and then professional standards strictly define assurance and related services and how they get delivered.
Essentially, CPAs may provide the following accounting and assurance services if they follow the law and professional standards:
Financial Statement Compilations, a service whereby the CPA organizes and presents financial statements and sometimes related footnote disclosures. A CPA provides no assurance when it performs a compilation. And the standard compilation report a CPA firm delivers as part of performing a compilation explicitly says that. (See CPA Charles Hall’s discussion of what a compilation requires and what the standard report looks like here: Definitive Guide to Compilations.) But that lack of assurance saves the small business owner money. Figure a last-minute, full compilation costs between $2,000 to $3,000.
Financial Statement Reviews, a service whereby a CPA provides limited review and testing of some of the information and some of the disclosures in a business’s financial statements. A review maybe costs $5,000 to $10,000. (Charles Hall provides another useful discussion here and shows what a review report looks like: Definitive Guide to Reviews.)
Financial Statement Audit Opinions, a service whereby a CPA firm does extensive testing and analysis of accounting information and then usually issues a boilerplate audit opinion that says the business’s financial statements follow generally accepted accounting principles and are materially accurate. You can get an idea of what an audit involves by looking at this resource from the Association of International Certified Professional Accountants (AICPA) resource, Forming an Opinion and Reporting on Financial Statements. (The actual audit opinion appears on page 37 of the document.) But the main takeaway for a prospective mortgage borrower: Though an audit represents a significant expenditure–figure $10,000 to $20,000 even for a small organization–it does not provide any of the assurances a mortgage lender seeks via the typical mortgage comfort letter.
Agreed Upon Procedures, essentially a forensic accounting service whereby a CPA firm performs specifically defined test procedures and then reports on the test results. The AICPA also provides a good resource describing what agreed upon procedures entail, Agreed-Upon Procedures Engagements. But to summarize, a CPA firm might examine all the disbursements in excess of some dollar limit and then verify that appropriate documentation exists and that accounting policies were followed and documented. The cost of an agreed upon procedures engagement, predictably, depends on the time required to devise procedures, follow them and then report on the test results. But the cost would possibly run anywhere from a few thousand dollars to tens of thousands of dollars depending on the number and type of procedures.
A key thing to note again about the above list. Nothing on the list looks anything like the CPA firm providing assurances to lender via a last-minute mortgage comfort letter.
What Lender Wants from Small Business Owners
Let’s start with what a prospective mortgage lender wants. The mortgage company wants assurances from not just you, the borrower, but from your accountant.
Specifically, lenders ask your accountant to confirm or sometimes to “certify” that the down payment used to buy a property won’t threaten your solvency of your business. Or its health.
The lender may also want your accountant to confirm that information you’ve given the lender is accurate. Up to date. Or complete.
If you supplied last year’s tax return, the lender may want the CPA to confirm you haven’t amended the tax return. Or that your financial situation hasn’t changed for the worse.
We also see lenders asking CPAs and CPA firms to confirm that a borrower owns a business at the time of the loan application, for example.
But the really important point here: Almost always, lenders ask CPAs to confirm or to “certify” historical information that CPAs simply obtained from the borrower. Not information which the CPA independently confirmed or verified or developed. And not current information the CPA would possess.
CPA Letter For Apartment Rental Or Home Mortgage
FAQ
How much does a CPA letter cost for a mortgage?
What is a CPA comfort letter?
What is a CPA verification letter?
Why do mortgage lenders ask for CPA letters?
Do you need a CPA Letter for a mortgage?
If you are a business owner and your lender is requesting a CPA letter for a mortgage, you’re in the right place. For self-employed, business owners, or partners needing independent verification of income or business assets for a mortgage lender.
How does a CPA write a letter to a borrower?
The CPA then drafts a letter that typically includes: Confirmation of the borrower’s self-employment status. An overview of the business’s financial health and stability. A statement on the borrower’s compliance with tax laws. Insights into the financial trends and future prospects of the business.
What is a CPA Letter?
A CPA letter is a specific type of comfort letter where the trusted third party is an accountant or accounting firm. Other entities that can release comfort letters include banks, private companies, underwriters, and governments.