As Certified Public Accountants (CPAs), we often receive requests from small business owners to provide a comfort letter for their mortgage applications. A comfort letter is a letter that verifies financial information about a borrower, such as their income or assets. While it may seem like a helpful tool for small business owners, CPAs should be cautious about providing comfort letters for mortgage applications. In this blog, I'll explain what a comfort letter is, why CPAs should not provide them, and what alternatives are available for small business owners.
What is a Comfort Letter?
A comfort letter is a document that provides assurance to a lender about a borrower's financial situation. It is typically requested by small business owners who are applying for a mortgage and need to verify their income or assets. The comfort letter is written by a CPA or other financial professional and is intended to give the lender confidence that the borrower is financially stable and can repay the loan.
Why CPAs Should Not Provide Comfort Letters
There are several reasons why CPAs should not provide comfort letters for mortgage applications. First, providing a comfort letter can create a conflict of interest for the CPA. The CPA's primary duty is to their client, not the lender, and providing a comfort letter can create a situation where the CPA is caught between the two parties.
Second, providing a comfort letter can also expose the CPA to potential legal liability. If the borrower defaults on the loan, the lender may try to hold the CPA responsible for any financial losses. Even if the CPA acted in good faith, they could still face legal action.
Finally, providing a comfort letter can compromise the CPA's independence and objectivity. By providing assurance to the lender, the CPA may be perceived as endorsing the borrower's financial situation. This can compromise the CPA's ability to provide objective financial advice and may damage their professional reputation.
Alternatives for Small Business Owners
While CPAs should not provide comfort letters for mortgage applications, there are alternative ways for small business owners to verify their financial information. One option is to provide the lender with copies of tax returns or financial statements. This documentation can provide the lender with the information they need to assess the borrower's financial situation without compromising the CPA's independence or objectivity.
Another option is to work with a mortgage broker who specializes in working with small business owners. These brokers have experience working with borrowers who have complex financial situations and can help them navigate the mortgage application process.
While small business owners may feel that a comfort letter is necessary to obtain a mortgage, CPAs should be cautious about providing them. Providing a comfort letter can create a conflict of interest, expose the CPA to legal liability, and compromise their independence and objectivity. Instead, small business owners can provide documentation such as tax returns and bank statements or work with a specialized mortgage broker to help them navigate the mortgage application process.
HOW SCHWARTZ IS HELPING SOUTH JERSEY SMALL BUSINESS OWNERS
Navigating these legal changes and what it means for your small business in New Jersey can be one of the biggest challenges you face in the coming years. Fortunately, Schwartz & Associates is already familiar with relevant tax laws and regulations you need to comply with, including the impact of the Biden Administration's new tax proposals. The American Families Plan (AFP) and American Jobs Plan (AJP) will bring with them new taxes on businesses in the coming year, and Schwartz is prepared to ensure your South Jersey business is not only in compliance but maximizing its benefits.
Contact us for more insight into what these changes may mean for your business specifically and what we can do to ensure you're getting the most out of your deductions.