Stated income commercial real estate loans first emerged in 2008. Their innovator was the company Ameriquest. They were offered by banks as part of their regular repertoire and were cheaper than today. Then came the string of defaults, and banks pulled out as fast as they could. Today only a few intrepid individuals sign the loans and fund them from their own pockets. In order to ensure maximum profit and to offset risks, these unconventional lenders set arbitrary rules, terms, payment rates, and schedules. The types of properties that can qualify for a stated income loan include: Apartments, restaurants, retail properties, office spaces, warehouses, storage units, and auto service spaces among others. Borrowers use the funding for: debt consolidation (putting the funds towards IRS payments, credit card debt, and similar); property acquisition; real estate improvement; working capital; and refinancing.
Stated income loans: The process
If you are a borrower, here’s what your lender will request:
- No W-2 income documents
- No need to furnish tax returns
- No IRS documents
- No need to show proof of employment
Instead, you’ll be simply asked to state how much you earn and you’ll be taken at your word. Little wonder that these loans are called ‘liar’s loans’ or ‘liar loans’! Stated income mortgage loans have become increasingly popular for borrowers with low credit as well, especially in the case of people who have an unstable source of income or have reduced self-employed income shown on their taxes. Many companies process loan requests as high as $500K and offer fixed rates for periods up to 35 years. Funds can be used to purchase or refinance commercial real estate, and the approval process is much shorter than traditional loans. Closings are typically completed in only 2 to 3 weeks.Also attractive is the fact that this financing solution requires much less paperwork on the part of borrowers, which means applicants get access to funds a lot faster. Your application for a stated mortgage loan is approved based on your cash reserves or equity and on your ability to afford the monthly payment. Whether you can or not is essentially based on what you tell your lender.
The conditions of these loans makes them alluring to customers with a wide range of credit histories, including subprime borrowers. The lack of verification makes these loans simple targets for fraud.
Stated income commercial real estate loans are also appealing in that they fill a gap of situations which normal loan standards would not approve. For example, a standard rule is that a customer’s mortgage and other loan payments should take up no more than 45% of the person’s income. This makes sense when it comes to a person applying for a mortgage for her first home. However, a real estate investor may have multiple properties and for each may receive only a small amount more than their loan payments on each house, but end with $200,000 in disposable income. Nevertheless, a non-stated income loan would decline this person since his, or her, debt to income ratio would not be in line. The same issue can arise with self-employed borrowers, where the bank with a fully documented loan would include the borrower’s business debt in their debt to income calculation. Stated income loans also help borrowers in cases where fully documented loans normally would not consider the source of income as being reliable and stable. Examples include investors who consistently earn capital gains.
Finally, fully documented loans also do not consider potential future income increases. (This is similar to the ‘no income disclosure’ loan).
So what’s the catch?
Plenty. There’s higher interest for one. Lenders are taking a huge risk by extending this type of loan to you, so they want to make sure it’s worth their while. They’ll be asking you for enormously huge repayments – think of double, if not triple the rates of the conventional loan. So consider that you’ll be forking out magnanimous repayments each month.
Then, there’s the higher chance of default. Banks cover their risks by assessing your ability to repay. In this way, they lower the chances of default. Unconventional lenders who hand out these stated income, or ‘no doc’ loans, basically accept anyone on his or her word. Most of these applicants tend to overstate their income falling into unwelcome levels of bankruptcy as a result.
Tips from the experts to help you profit from Stated income commercial real estate
The real estate firm, Capital Finance Partner recommends that you only enter for such a loan once you are convinced that you have enough income to cover the mortgage, taxes and insurance. Clients will need a minimum credit score of 600 and must have a W-2 or be self-employed. The loan-to-value ratios, he says, are as follows:
- Up to 65 percent: Office, self-storage, warehouse, and retail spaces
- Up to 70 percent: 1 to 4 unit non-owner occupied real estate
- Up to 75 percent: 5+ unit multifamily properties
Financial Capital Solutions helps you calculate your possibility of gaining this loan by mentioning that as long as your property value can support mortgage servicing, taxes and insurance, you have a good chance for approval.Clients with a 600 credit score and higher are typically eligible. This 600 score seems to be the minimal post facto requirement across the board. Creekstone Commercial Capital requires that applicants have an income that horvers between $100K and $5M and between 65 and 75 percent LTV depending on the size and type of space.
Investopedia gives general advice for getting the loan. For people who are self-employed, it suggests that you prepare a list of your recent clients and any other sources of cash flow, such as income-producing investments. The bank may also want you to submit an IRS Form 4506 or 8821. Form 4506 is used to request a copy of your tax return directly from the IRS thus preventing you from submitting falsified returns to the mortgage company. Form 8821 authorizes your lender to go to any IRS office and examine the forms you designate for the years you specify.
Some self-employed individuals still have an income that is so unpredictable and hinders them from obtaining even this stated income loan. Think of freelancers for instance. In such a case, Gloria Shulman, a mortgage broker and founder of the Beverly Hills, California-based Centek Capital Group, suggests that they look for a long-term project and ask to be brought on as a W-2 employee. This gives you a more stabilized impression, and provides the W-2 that lenders want while you continue your freelancing. Shulman also recommends buyers to downsize their price range, at least on a first home. There’s time to ‘upsize’ in the future.