Stated income loans can open doors for you if you don’t meet the stringent requirements of traditional commercial property loans. Typically favored by borrowers with non-traditional income sources — such as landlords, retirees who want to invest in CRE, and entrepreneurs who want to buy their business premises — these loans cut through the red tape and make it possible for you to qualify even if you can’t produce conventional documentation. This can be particularly beneficial if you have multiple income streams or irregular payment schedules, making providing traditional proof of income challenging.
Sounds simple. Not quite. It’s essential to recognize that, like any CRE loan, stated income loans can be risky if you don’t use them properly.
What are stated income loans in commercial real estate?
Often called no-doc or low-doc loans, stated income loans for CRE are designed to ease the application ordeal, especially for borrowers who may need to fit standard income verification molds.
These loans allow you to qualify based on your “stated” income — the income you declare to the lender instead of the income stated on your tax returns or pay stubs. It bypasses the need for extensive documentation and may be useful if you’re self-employed or your income doesn’t follow a conventional pattern.
How do stated income loans for CRE work?
Instead of focusing primarily on your personal financial history, lenders of stated income loans evaluate the income-generating potential of your commercial property. These loans may be the best option if your investment property is solid, but your financial records are less vital.
Do note that with less proof of income, lenders see you as a higher risk — which often means that they’ll charge you more in interest to mitigate this risk. You can also expect limits on how much you can borrow. After all, lenders are cautious due to the reduced income verification, directly affecting the loan amounts they’re comfortable offering.
Risks of stated income CRE loans
While stated income loans can fast-track your path to financing, they also introduce notable risks, especially in commercial real estate. Ensure you fully understand the following before proceeding with this type of loan.
Risk #1: High downpayment requirement
Elevating closing costs is one key factor you’ll face when choosing stated-income CRE loans.
Most stated-income lenders will ask for a significantly larger down payment than what you’d pay in traditional loans. This requirement isn’t just about the lender being cautious — it’s also about compliance with regulations like the Ability to Repay rule. By requiring a hefty down payment, lenders safeguard themselves right at the start and ensure they recoup a portion of their investment even if they default.
Closing costs associated with stated income CRE loans also tend to be higher than other mortgage types. This is all part of the lender’s strategy to offset the increased risk they’re taking by not verifying your income.
Risk #2: High interest rates
Stated income loans carry higher interest rates than traditional loans because lenders try to create a cushion and ensure they can make a profit even if a default occurs. This is why it’s important to crunch the numbers thoroughly. While skipping the income verification step might seem convenient initially, you must consider the long-term financial implications of higher interest rates. They can significantly increase the total cost of your property by hundreds of thousands of dollars more than the initial price tag. So before you sign on the dotted line, Ensure you’re fully aware of how these costs will play out over the life of your loan.
Risk #3: Higher financial strain
As mentioned, stated income loans are more expensive in order to balance out the risk posed by less verified financial information. This can cause strain if your CRE business plan is less than solid. Does your property’s cash flow hinge on occupancy and rental rates? Be aware that any fluctuation can add significant financial stress to your operations. Increased financing costs can quickly eat into your profit margins and make managing your property more accessible.
Risk #4: Overstated income
Stated income CRE loans let you declare your earnings without exhaustive documentation, which can be highly beneficial if your income comes from diverse sources and your CRE properties still need stable revenues. But this convenience might tempt you to overstate your property’s income potential to secure a larger loan. And if the actual earnings fall short of covering the mortgage payments, you may experience financial difficulties.
For instance, if your property underperforms due to economic downturns or overestimated rental values, you may find it challenging to meet loan obligations and eventually default. This can lead to foreclosure and severely damage your reputation as a CRE investor, not to mention your credit score.
Risk #5: Legal implications
The relaxed documentation standards of stated income loans may also pose legal and ethical challenges. Misrepresenting your income or a property’s financial health — intentionally or inadvertently — can lead lenders to accuse you of fraud. Make sure to provide accurate income estimates and ensure that all your financial representations are truthful and substantiated to avoid such legal complications.
Risk #6: Prohibitive restrictions
When you start to explore stated income loans seriously, you’ll encounter a long list of stipulations based on your loan size, credit history, and other factors. These loans often impose restrictions that could complicate the acquisition or limit the types of properties you can buy. Some stated income loans are also exclusively available to buyers of second or third properties and demand excellent credit scores and asset verification.
Make sure you fully understand the lender’s requirements. Do your research, assess your situation, and seek out lenders who match your circumstances.
Different lenders have different requirements, but you’ll generally need to meet the following:
- A good credit score – It’s best to aim for over 700 to demonstrate reliable debt management, though some private commercial real estate lenders may accept scores as low as 650.
- Substantial down payment—To minimize risk, Lenders typically require a down payment of 20% to 30% of the property’s value.
- A good amount of savings—Lenders want to see significant assets or savings that you can liquidate quickly if you default.
Risk #7: Market volatility and investment risks
Commercial real estate markets respond sharply to economic changes. Shifts in consumer behavior or broad economic downturns can quickly affect your property’s value and the viability of your CRE investment. Because properties financed with stated income loans may become challenging to refinance or sell if market conditions worsen, you must be prepared with a plan B if market conditions deteriorate.
Should you take out a stated income CRE loan?
Stated income loans for commercial properties aren’t inherently bad, nor are they always the best choice. These loans are widely used by CRE investors who don’t qualify for traditional loans. However, they come with risks like any other loan does.
The key to making the most of your stated income loan is carefully weighing these potential downsides against the benefits. Evaluate your financial stability, the CRE property’s income potential, and the overall market conditions thoroughly and methodically. Consult financial experts and be open to other financing options.
Explore stated income loans for commercial properties with Private Capital Investors.
With the proper knowledge and lender, you can successfully turn the possible downsides of stated-income CRE loans into advantages. You can rely on our team here at Private Capital Investors.
As a direct lender specializing in stated income loans and other CRE financing solutions, we offer customized products tailored to your situation and protect your interests.
Skip the hassle of submitting tax returns, W-2s, and bank statements. With our streamlined and low-documentation process, you can get the financing you need swiftly and efficiently — as soon as 14 days from application. Approval times can be as quick as 24 to 48 hours.
Our stated income loan amounts for commercial properties range from as low as $1 million to as high as $50 million. With minimum credit scores starting at 650, we make qualifying easy. You will also benefit from our competitive rates (as low as 5.99%) and nationwide lending capabilities.
You can use our stated income loans for various commercial properties, including office, multi-family, retail, urban land, luxury residential, light industrial, and self-storage. Whether you need financing to improve a CRE property, quick access to working capital, refinance or want to consolidate your current debt, we’re here to help.
Experience the difference with Private Capital Investors, where you can expect nothing less than excellent customer service, common-sense underwriting, and a dedication to meeting your needs. Contact our team of private commercial real estate lenders today and tell us more about your commercial real estate project.
