Why You Must Have a Personal Financial Statement

You have gathered a list of bankers and are planning to shop around for a loan for your next deal. Without this loan you know you won’t have a deal, so you want to put your best foot forward. You also want to be able to compare different offers from banks. Banks want a bunch of information from you and it would be much easier if you had already compiled all that information into a single document. What you need is a Personal Financial Statement (PFS).

The PFS is a one or a two page document that is used to give a snapshot about your financial health. It doesn’t give any proof of your financial health. The bank will later ask for proof of various claims you make on the PFS. It is used as a first step in underwriting – if the PFS isn’t up to snuff, the loan application will go no further. Making the PFS be as well-designed as possible, but also correct, is the best way to get that mortgage you want.

Components of the PFS

The PFS is comprised of data only. Don’t put on any love letters here. Love letters is the term used for telling people about yourself and trying to appeal to them to sell you their property, or even give you a loan, but they don’t belong on the PFS. The first part of the PFS is your identifying information. This is followed by a balance sheet. Last is the income statement.

Identifying Information

  • Your name
  • Your date of birth
  • Your personal phone number (make it easy to be reached)
  • Your email

Balance Sheet

This part of the PFS is designed to give a quick picture of your assets and liabilities. Assets are the things that you own and liabilities are the things that you owe. Under assets, you will put the name of the asset and next to it how much it is worth. If you are paying off a loan, it will be reflected later. So, if your primary residence is worth $300,000 and you still owe $100,000 you will write the address, that it is your primary residence, and the total value ($300,000). The balance sheet does not reflect your monthly payments, rather the total value of assets and liabilities. Assets include but aren’t limited to:

  • Your primary residence
  • Any other real estate held in your personal name (if held in a company, that will show up later)
  • Vehicles
  • Investments (stocks; ventures that you don’t control but invest in)
  • Retirement account balance (these may be in stock, but separate this as the liquidity of this investment is different from other investments)
  • Other assets (includes personal items such as jewelry, art, books; only include expensive ones that could be reasonably sold for the amount you claim, these are difficult for you to prove the value and if you can’t prove the value don’t bother to put them on the PFS)
  • Ownership in businesses along with your percentage ownership and the business’s value

Liabilities are listed next. They include but aren’t limited to:

  • Mortgages (the principal, or balance due)
  • Credit card balances
  • Other loans you owe, such as student loans and vehicle loans

Subtract the liabilities from the assets and you end up with your sum-total value as a human being, your Net Worth. Put that in on the bottom line. The net worth isn’t terribly important as there are many better measures of your worth as a member of the world, but it is helpful to watch this hopefully grow as you update the PFS over the years.

Income Statement

The balance statement was all about equity in things you own, and the income statement is all about your cash flows. The two parts are Income and Expenditures. Income includes but is not limited to:

  • Your monthly paycheck from your W2 job. For some this will be the same every month, for others it will change. If yours changes, take your annual income and divide by 12. Put one line item for each job you have.
  • Business income (this is only the income that your business is paying to you in your name; business income that stays in the business doesn’t belong here and would be on the business’s financial statement)
  • Other income (put on monthly income from other places such as contracting work, sales income, and Internet income. Only put steady income in here and make it the average monthly income)

Expenses can be as detailed as you want, but most banks will presume that recurring expenses such as utilities and food are a certain percentage of your income. They are optional on here but I’ve added them. I’d add them if you think that your bills are lower than the typical applicant. Expenses include but aren’t limited to:

  • Monthly payments to each mortgage you have
  • Other monthly payments on loans
  • Credit card payments
  • Annual property taxes divided by 12
  • Annual insurance payments divided by 12
  • (optional) Utility payments (electric, gas, water, TV, phone, and others)
  • (optional) Food bills

Take the monthly income and subtract the monthly expenses and you arrive at your personal monthly Cash Flow. This is your personal profit and the amount that you could reasonably use to pay for a new expense such as a mortgage. If you are getting a personal loan this must cover the loan with some to spare. If you are getting a commercial loan, then the new asset needs to make enough money to cover it but won’t show up on the PFS. The bank will want your cash flow to be enough that you can personally pay some mortgage payments on a commercial loan should times get tough and the business runs in the red. This is why you need to submit a PFS for both personal and commercial loans.

Get your PFS ready now so you can quickly forward it when asked. You should update it at least annually, but better to do it every 4-6 months. Banks will usually accept a PFS that is less than a year old. Updating more frequently is a great way to watch how you are doing.

Sometimes a bank sends you their own PFS form but this is usually because most people don’t know how to write a PFS. You usually don’t need to use their template. In fact, using your own looks like you know what you are doing. If you send the PFS to the bank quickly when asked, this also looks good. I can give you my template – send me an email.

Dr. Equity