There was a time in the history of real estate industry when the borrowers of a debt could easily get their loans financed by applying for a Commercial ‘Stated’ income loans.
These loans were made easily available to the loan borrowers where only ‘Stated’ income of the borrower is considered and not the actual income as they do not verify the income sources!
Having a verified income may not be a cakewalk for everyone and some of them find it extremely challenging to finance a loan based on their actual income (Like the self-employed professionals or freelancers who do not have salary slips).
The easiest option for such people was raising a loan by applying for a ‘Stated’ income loan.
But in the year 2008, the housing market crash had an adverse effect on stated income loans.
The Dodd-Frank act that was passed in 2010 further heavily regulated the banking and private lenders’ policies leading to the downfall of stated income loans.
This changed the trend of availing stated income loans and the industry of commercial real estate saw many changes during this change.
This continued for many years until the year 2015 when the stated income slowly started entering the market again!
And now, in 2018, you’ll find both banks and private money lenders who are ready to finance stated income loans.
So, it is good news for all those who have a hard time in applying for a loan that requires the borrower to have verified sources of income.
Here are some fundamental things you need to know to understand the nature of commercial stated income loans better which help you in your decision making.
What are the advantages of financing a stated income loan?
1) Very little documentation
Unlike the conventional loans, stated income loans do not require too many documents to be submitted at the time of applying for a loan.
You don’t have to submit your income tax returns or any other details of your earnings.
Documentation is one of the biggest limitations to many people who are willing to purchase a commercial real estate.
With stated income loans, you can easily tackle this problem and get your loan approved.
2) Quick processing time
In the game of real estate, time becomes the greatest essence sometimes.
When there’s the best deal for you and you really want to buy a property and have no cash, you would not have the patience to wait for your loan approval which would take days together for processing in case of conventional loans.
When you know that it’s the best time to buy a real estate property and you have no means of raising immediate funds, don’t blame it on your fate or luck!
All you’ve got to do is think about stated income loans. The processing time here is much lesser thus giving you the time benefit.
So even though your credit score is impressive and you can, if you wish to, get a conventional loan, it’s always better to apply for a commercial stated income loan in case of urgency in raising funds.
3) No income verification is required
When you apply for stated income loans, banks or your private capital provider would not demand income verification.
This not only saves time but also keeps at bay the unnecessary verification processes with a lot of paperwork and questions. Hate paperwork and verification processes?
If yes, stated income loans are tailor-made for you. Especially if you’re self-employed professional or a person who works on a contract basis and do not have a fixed source of income, or have multiple sources of income coming from different people having inconsistent trends, stated income loan is the best loan for you.
4) High Loan-To-Value rates
Stated income loans provide 70% LTV rates which is comparatively very higher than other types of loans.
The LTV rates may vary from bank to bank and lender to lender, but the rates bracket, however, remains between 60-70% only.
5) Most stated income loans do not have pre-payment penalties
If you spend a little time checking the features of different stated income loans issued by different banks and private lenders, you will come across some loans that are free of prepayment penalties.
This is a great benefit because when you have sufficient funds to repay the loan, you easily may do so without having to worry about how much money you’ll be spending extra in the guise of prepayment penalties.
While you’re applying for a loan, this factor may not be on your checklist. But at the time of repayment of your loan, you’ll land in trouble if you don’t consider prepayment penalty rates.
They were some of the pros of availing stated income loans. When you’re taking a call on what type of loan to rise, you should also know the disadvantages of raising it so that you can make the best decision.
Here are some major disadvantages of availing stated income loans. Take a final call only after weighing both pros and the cons of raising a commercial stated income loan.
Disadvantages of stated income loans
1) High mortgage rates.
Well, this one goes unsaid I guess. Since the stated income loan is not based on your actual income or you’re earning capacity (As they do not conduct any income verification process), it’s quite obvious that they charge high mortgage rates.
Also as these loans are processed in much lesser time, it’s a high-risk loan for the loan providers, be it banks or private loan lenders and thus high mortgage rates are charged.
2) Stated income loans cannot be processed if you want more than 70% of the total purchase price.
Due to the high-risk factor involved, these loans will not be issued if you want more than 70% of your total purchase price. This can be a major issue if you want to pay 90% of the purchase price to the property sellers.
3) High Down payment requirements
The down payment requirements for stated income loans are not anything lesser than 30% of the total loan value.
This can be a huge amount in case you don’t have sufficient funds. On the other hand, other types of loans do not require such high down payments making it easier for you to avail the loan.
Weigh the pros and cons of commercial stated income loans in the might of your needs, requirements, and limitations before taking the final call. Once you’ve made up your mind for availing stated income loans, here are some requirements that you need to fulfill for availing the loan.
Requirements for stated income loans
1) A good credit score to begin with
Since the stated income loan does not require an income verification process, the least the loan providers can ask for is for you to have a considerable credit score.
The banks or private money lenders who finance commercial stated income loans must believe that you the capacity to repay their loan and this can be done only if they have trust in you.
The credit score judging criteria differ from one bank to another and one private lender to another, however, the main criterion remains the same – Your previous loan repayment history!
They don’t need your salary history or income history but yes, they surely are interested to know your loan repayment history.
2) Bank statements
As stated income loan providers do not ask for your tax returns or your previous income history, they have very less idea about how much you’re actually earning.
So it’s their policy to ask your bank statements having details of previous 2 to 4 months’ transactions to have a wild guess on your loan repaying capabilities.
3) Ability to pay high down payments
Unlike other conventional loans, stated income loans require high down payments.
So you must be in a position to arrange such high down payments in order to be qualified for availing stated income loans.
This can come from your savings or other refinancing options. But what you must remember is that your loan application for stated income loans would be rejected straight away if you don’t have the ability to pay the down payment immediately.
The last question – How to apply for stated income loans?
Stated income loans can be applied by a very simple process as it requires minimal documentation.
All you’ve got to do is to fill up the application form for stated income loans and the banks or your private lenders will decide if you’re eligible for availing the stated income loan.
Once the loan is approved, you’ve got to submit your bank statements along with the down payment and loan fees to avail your loan.
Don’t forget to go ‘Window-shopping’ of different banks and private lenders to get the best rates and terms for your commercial stated income loans.