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Perhaps no other aspect of the credit application process is more daunting to a borrower than the completion of the personal financial statement (PFS). The PFS (also called a personal balance sheet) is a snapshot of the financial condition of an individual or a couple, if the application is made jointly, as of a specific date in time. Providing a PFS in some form, either lengthy or abbreviated, is required for most types of loans. If its lines and boxes and schedules seem intimidating, take a deep breath. Completing a PFS isn’t nearly as difficult as it seems.
In fact, you may not realize it, but if you’ve applied for credit in the past, chances are that you’ve provided at least some of the information necessary to complete a PFS – and if you’ve applied for a mortgage
before, the application, itself, actually includes a PFS. So, let’s take a look at the three most important components of the PFS: assets, liabilities and net worth.
Personal Financial Statement: Assets
The assets section is a list of what you own, and the list is in order of liquidity. Cash on hand or in banks is the top line entry and includes everything from your checking and savings balances to certificates of deposit (CDs) to the cookie jar tucked in the back of the cupboard or the coffee can buried in your back yard.
From there, each item is listed through marketable securities (stocks and bonds), automobiles, real estate, retirement accounts and other items of value, such as jewelry, coin collections, cash surrender value of any life insurance policy (typically whole or universal life, but not term policies) and general household goods, like furniture and clothing.
Space is allotted for the inclusion of “other” assets you may wish to include. Estimates of these values are acceptable, and sometimes consulting an insurance policy’s
replacement cost yields a reasonable figure to use. Remember to list each type of asset owned regardless of whether there is a debt owed against it or not.
Personal Financial Statement: Liabilities
Liabilities include debts that you owe, such as mortgages on real estate, bank loans, loans from relatives and/or friends, student loans, loans against life insurance policies, auto or boat loans and credit cards. Again, estimates are fine. Balances change regularly, and it is not necessarily a worthwhile exercise to chase down statements. Monthly expenses, such as utility bills or insurance premiums, are not listed as liabilities.
Personal Financial Statement: Net Worth
The net worth section is simply the difference between the cumulative value of the assets owned minus the cumulative debt owed. The term “net worth” on a PFS is the same as “equity” on a business’s balance sheet. The PFS is always driven by the balance sheet equation: assets – liabilities = net worth.
Just like before, estimates of asset values or balances on debt are fine, but use your best approximation.
Other Sections of the Personal Financial Statement
Now, let’s briefly discuss the other sections of the PFS. Each statement is typically addressed to a financial institution, and if your lender
provides a blank form, then its name may be printed at the top. If the statement is generic, fill in the name of the lending institution requesting the PFS. Spaces for your name, date of birth, and Social Security Number are often listed, and there is also a box to check whether the statement is individual or joint. Fill in the statement date.
Additionally, the PFS will likely include a section to list sources of income from employment, investments, interest and dividends. In the same section, you will find spaces for monthly and other expenses (mortgage payments, utilities, income taxes owed, insurance premiums, etc.) Estimates are acceptable in these spaces as well.
Furthermore, detailed schedules, including marketable securities, real estate owned, specific bank or brokerage accounts, life insurance policies and current loans or institutions where credit has been previously obtained, will need to be completed. An example of such detail would be the date your home was acquired, address and market value estimate; mortgage holder; monthly payment; balance owed; and loan maturity.
One important note: The life insurance section will ask for the face amount (death benefit) of the policy, issuer, beneficiary and cash surrender value. Do not confuse the death benefit with cash surrender value. It’s okay to attach an additional sheet of paper if you need more space.
Final Steps to Finish Your Personal Financial Statement
Also, remember to check your math, sign and date the PFS. Place it in an envelope for delivery to the receiving party to prevent your confidential information from falling into the wrong hands. Keep a copy for your personal records.
If you have concerns, don’t hesitate to contact an accountant or a representative of your lending institution. Chances are, they have heard your questions before and can help ease your mind.
About the Author
Adam Headley is a writer and career banker with more than 30 years of experience in finance and lending. He has written extensively on the varied aspects of building, purchasing and owning a log or timber home.