Are you ready to invest in real estate or buy a home base for yourself? Be careful if your lender asks for a mortgage comfort letter.
As a business owner buying property, it’s quite common for a mortgage lender to ask for a letter from your CPA or tax accountant. If this happens to you, proceed with caution or better yet, push back or find a different lender that doesn’t ask for this.
Why? Because often this letter asks your tax professional to violate professional standards.
Understanding the Mortgage Comfort Letter
Mortgage lenders seek reassurance not only from the borrower but also from their accountant. They typically request the accountant to confirm or even “certify” various aspects, such as ensuring that the down payment for a property purchase doesn’t jeopardize the business’s financial stability.
Additionally, lenders may seek confirmation of the accuracy, currency, or completeness of the financial information provided by the borrower. This could include verifying that the information matches last year’s tax return, ensuring no amendments have been made, or confirming the ongoing ownership of the business.
However, it’s crucial to note that these requests often pertain to historical information obtained by the tax professional from the borrower, rather than independently verified by the tax pro. See the difference?
The lender may even request the tax pro or CPA confirm that your financial situation hasn’t changed for the worse. But this isn’t the tax professional’s job. They cannot verify your financial situation. They take the information YOU provide to them and guide you to the best tax situation possible. It’s important to note that the information you provide is used to complete a return and you, as the taxpayer, agree that this information is true and accurate to the best of your knowledge.
The tax pro or CPA does not certify any data on the return. Tax preparation is not meant to verify any data or your financial situation.
Types of Services CPAs Can Provide
What’s the challenge with mortgage comfort letters? The lender wants assurances. However, Federal and state laws, along with professional standards, strictly define the scope of assurance and related services that CPAs or EAs can offer.
CPAs may provide various accounting and assurance services within legal and professional boundaries:
Financial Statement Compilations: These involve organizing and presenting financial statements without providing any assurance. While cost-effective, compilations do not offer the assurances sought by mortgage lenders.
Financial Statement Reviews: These entail limited review and testing of financial statements but fall short of providing the desired assurances for mortgage purposes.
Financial Statement Audit Opinions: Extensive testing and analysis are conducted to issue an audit opinion, but this service does not align with the assurances typically sought by mortgage lenders.
Agreed Upon Procedures: Specific test procedures are performed with results reported, but again, this does not meet the requirements of a mortgage comfort letter.
All the above services are expensive and take time. Often the lender wants a letter immediately and the borrower, you, don’t want to pay thousands of dollars for these extra services to get a mortgage.
Further, only a CPA can provide these services but CPAs are not the only professional tax preparers. Enrolled agents (EAs) and tax attorneys, among others, can be paid for tax preparation services. Neither an EA nor an attorney can legally provide any assurance services and providing a comfort letter still violates ethical standards of their profession.
Addressing the Mortgage Comfort Letter Requirement
First, lenders should not ask borrowers to ask their tax professional for typical mortgage comfort letters.
Given the mismatch between lender expectations and CPA (and other tax preparer) capabilities, borrowers should push back against requests for typical mortgage comfort letters. Complaints to regulatory agencies could push back against such requests. Simply holding firm that it’s not necessary and doesn’t prove anything could work in some cases.
Additionally, online reviews of lenders can also raise awareness and potentially deter such requests.
Alternatively, borrowers may seek a letter from their tax professional that provides no assurance to the lender but offers a degree of comfort. Such a letter, while not providing the desired assurances, may suffice for certain lenders. This letter could simply state the obvious and repeat whatever already appears within the filed tax return.
Mortgage Comfort Letter
It’s important to communicate effectively with your tax pro regarding such requests, allowing adequate time for letter preparation. You shouldn’t expect an immediate turnaround for this and neither should your lender.
Additionally, be prepared for associated costs, as custom letters may entail significant fees. Ensure your lender is receptive to alternative letters that confirm information without providing assurances beyond their expertise or what’s allowed within their professional standards.
This letter, in other words, is simply there to describe information already provided in the tax return. It is not a letter that assesses solvency or confirms (or “certifies”) facts.