Lenders typically request that borrowers fill out personal financial statements (PFS) when applying for a loan. These personal financial statements can vary somewhat, although the SBA uses Form 413. A PFS shows the bank a borrower’s cash position, how much liquidity they have to take on a new loan and their ability to pay back future loans. It’s important to understand the typical questions on a PFS, so you can fill them out accurately. Below are components of a PFS that are most confusing to our clients.
The Asset Portion of Personal Financial Statements:
• What is Cash on Hand? Cash on hand is money that you have in checking accounts and in cash on your person that is immediately available to you (liquid). Be prepared to furnish bank statements to support your cash availability.
• What do I need to know about my life insurance policies? You only need to declare life insurance policies if you have a whole life policy with a cash surrender value. So if you have a term life policy, you cannot consider it as a current asset, as it has no cash value.
• Real Estate and Automobiles as Assets: Estimate the value of the automobiles you have and any real estate you own. This real estate includes your residences (primary and vacation homes). In addition, you will need to calculate the value of any commercial real estate you own. If you are a partner in a business that owns real estate, you can only claim the value of the real estate equal to the percentage of the business you own.
Declaring Liabilities on a PFS:
• Notes Payable and Installment Accounts: Gather all of your personal loan and credit card statements to fill out the liabilities section of the PFS. You’ll need to know what your payments and balances are.
• Car Loans and Mortgage Loans: Your automobiles and real estate are assets, but if you owe money on them, they are also liabilities. Complete your PFS by stating what the payments and balances are, the interest rate, and in the case of mortgages, who the lender is and when the mortgage will be paid off. If your commercial real estate is for a business in which you are a partner, you only need to declare the percentage of the mortgage equal to your ownership percentage.
• Loans Against Life Insurance: Again, this is only applicable if you have a whole life policy (not a term policy) and you have taken out a loan against the cash value of the policy. Otherwise, this should be left blank.
• Unpaid Taxes: Most lenders would prefer that you pay off overdue taxes. But you can show a small amount on your PFS and work through that process prior to closing.
Net worth is an equation. If you add up all your assets, and subtract all your liabilities, that is your net worth. It does not include your salary or your earning potential, just your declarable assets and liabilities.
If you are considering a loan for purchase or refinance and would like to discuss your plans, feel free to contact our team.