CPA Comfort Letters: They HATE Them.
Tax season is about to get going and if you’re a self employed borrower, you might be ready to buy a house just as soon as you can get that tax return filed. As part of your loan approval, your lender might ask you to reach out to your accountant (who may or may not be a CPA) to request that they confirm or explain something pertinent to your income analysis. Most recently, I’ve asked questions such as “can you confirm that the business on ____’s returns for 2023 and 2024 is the same business, just reported differently?” or “For rental income showing ‘various properties’ can you provide the list of properties used?”
You may find the response to this question is something close to baptizing a cat or asking a police officer where the best jaywalking spot in the city is located. What might feel like a straightforward request is described by one liability provider for accountants as “an unexpected annoyance and … unnecessary drain on valuable time” and another CPA firm suggests “a first borrower tactic should be to push back on the lender request” or “complain to the appropriate regulatory agency” - Ouch!
So, where does this come from? First, your accountant is engaged in the services you are paying them for and typically that does not include communicating with mortgage lenders. Time is money, and time spent communicating with your mortgage lender is time they can’t spend on paid services. Fair. Second, there is a justified concern that any representations they make, if used to make a credit decision, could make them liable if your loan defaults. Finally, mortgage lenders are using a tax return (which is prepared to IRS rules to determine tax liability) to project your cash flow available to pay a mortgage. It’s really not designed for that and sometimes lenders and the IRS speak different languages, but it’s what we are required to use for standard loan types.
We of course can’t pressure another professional into doing something that they believe is unethical or an unreasonable liability. And frankly, some underwriters absolutely DO try to pass the buck on income analysis to take less liability on the credit decision. One letter I will never ask for is confirmation that a withdrawal of business down payment funds will not affect operations of the business. Loan guidelines do not specify that your CPA should be the one to make this determination, and asking them to analyze your business cash flow trends to determine your required operating cash would be an involved and expensive task.
We also can’t approve a loan that has missing information just because your accountant won’t confirm the information, and there are instances where that may lead to a loan denial. If you are planning to buy a home, it may be worth asking your accountant before your taxes are prepared whether they will confirm any information for lenders in the future, and if so, what their process is for that.
Here are the portions of underwriting guidelines that can legitimately require your accountant, and how to ask fairly:
Final verification of employment before closing- if your accountant handles your books, they should be able to confirm this, but you can also confirm via an active licensing agency, website showing the business is open, etc. If your accountant does not do your bookkeeping, expect that they can’t confirm this if they haven’t seen your financials in several months and ask what alternatives are available.
Copies of certain forms that may not be generally sent to you- typically confirmation that a return was accepted by the IRS when transcripts are not yet available
Clarification of structural questions on your tax returns- for example, if you changed how your business files from a schedule C to a corporate return, confirmation that it is the same business. Length of self employment is relevant for your loan application and the business return will show your start date as the date the corporation was formed. If that is less than 2 years, confirmation that it was the same business in a different format will document your income is eligible.
Explanation of any fields that are relevant but not clear to a third party- for example, “notes payable within 1 year” must be considered in underwriting cash flow unless they are renewing or credit lines. We can only see the dollars, not whether it really is a check you have to write next month. “Other income” can only be used to qualify if we can explain that it is recurring and not a one time event, but without knowing what income is considered “other” and why, it’s hard to say.
What is NOT fair to ask your accountant is any representation of information they don’t know. They should be able to briefly explain what they did in the tax preparation, and what information was provided to them for a given question, but they can’t make projections into the future without being asked to perform a time consuming analysis for which they should expect to be paid, and they can’t make promises based off information they don’t have.
