Wouldn’t it be amazing if you could get a loan approved without having to provide any income verification or proof of documentation? As a borrower, you might say yes.
But as a lender, lending money to borrowers without verifying their income can be very risky. Stated income loans were Commercial real estate loans provided by lenders based on the income that was “stated” by the borrowers without conducting any income verification process.
They were around for a while across the States until the Housing Crash of 2008 happened. One of the main contributors to the Housing market crash of 2008 was Stated Income loans.
It had left the economy shaken with so many properties in disputes and even more lenders in huge loss where most borrowers became bankrupt.
Thus, the government had to interfere and stated income loans flushed out of the market. Policies were made more strict, both banks and private money lenders were now required to provide loans only to those who have stable income sources and could provide proof of such income.
In fact, for a few years, even taking the name of “Stated Income Loans” became a taboo with absolutely no or close to zero lenders lending such loans.
However, the Frank-Dodd Act of 2010 changed the date of Stated Income Loans for good. With this Act, Stated Income Loans were back into the market – only that they had changed in some ways.
Today, you can get a stated income loan both from banks or private money lenders, but not on the sole basis of what income you “state” but based on a few income verification proofs like bank statements, a good credit score, and huge down payment.
This blog is an overview of stated income loans for self-employed borrowers who do not have a regular or stable source of income. If you’re a self-employed borrower, the best type of commercial real estate loan for you could stated income loan. Read on to know why.
What are the qualifying conditions for average-employed borrowers to secure a conventional mortgage?
An average-employed borrower would need to provide W-2 forms, tax returns, pay stubs pertaining to the last 12 months and sometimes, bank statements in order to qualify for a conventional mortgage.
What are the qualifying conditions for a self-employed borrower to secure a stated income loan?
As a self-employed borrower, it can be daunting to find the right place to fund your real estate needs as most banks and other traditional lending institutions turn down the loan requests due to unstable income flow. On the other hand, you might feel skeptical about sourcing your loan from a private money lender.
However, you must note that there’s a good number of savvy Commercial real estate investors who’ve made it big only by having a trusted circle of private money lenders.
So, as long as you know how to choose the right lender for you, you cannot get this wrong. We’ve shared some tips on choosing the right kind of lender for you in the latter part of this blog.
As a self-employed borrower, here are some things you need to check off your list to qualify for a stated income loan:
- Bank statements related to the past 12 months – Lenders do not require cumbersome income verification, and all they’d expect from your end is to submit your bank statements. That’s the least they can ask for as they’re taking up the risk of lending without asking any other kind of income verification. These are needed for lenders to rest assured about the recovery of their loan.
- Huge down payment – As the risk is on the higher end for your lenders, you will generally be required to make a large down payment before your loan can be processed. A median percentage in the market would be 20% of your property value. This is also done so that lenders are assured of your commitment towards your home and knowing that you have 20% equity in your property definitely sounds peaceful.
- Vast reserves or savings – The next obvious thing your lenders might expect from you is to have vast reserves or savings. This assures them of final recovery at a worst-case scenario where you aren’t paying your loan liabilities on time. They might not ask you to back it up with the relevant documentation. It again depends mostly on the kind of private money lender you choose to work.
- Higher rates – This is a no-brainer. The prices on the commercial stated income loans are higher than their conventional loan counterparts.
- A good credit score – the Last thing on the list would be a good credit score. It needn’t be a “great” one though (if it’s “great,” more often than not, you shall easily qualify for a more conventional type of mortgage). A decent credit score of around 600 points should be good enough to convince your lender to approve your loan request.
These are the general qualifying conditions for a commercial stated income loan for self-employed borrowers. If you don’t think you satisfy all the terms stated above, do not break your heart.
Remember that you can always approach lenders, fix up an appointment, and talk your way through the deal, and get a loan approved.
What your lenders are interested in is to know and understand if or not you’ll be able to repay the loan. And if you are somehow able to paint a better financial picture during a meeting and convince your lender with your words or by showing a projected revenue statement for the coming year, you might get lucky and have your lender fund your loan.
Always remember that there’s no need to give up on trying to find a loan for yourself. Try, explore and ask around for best lenders in the market, meet them in person, talk to them about your needs, be honest about your cash flows, convince them of your income flows in the following 10-12 months, re-assure them of full repayment of all your loan liabilities – and in most cases, you won’t return empty-handed.
Moving on, here are a few things you should look for in your stated income loan lender:
Number 1 – The clientele of your lender
One of the first things you should look for in your lender would be their clientele. This can also mean the experience. More extensive the client, better it is as you can be assured that the lender has stayed in the market for quite some time and thus, it shouldn’t be a scam. Now, checking for clientele could be an easy task if the lender has openly put it up on the website or you might have to ask your lender directly about their experience in providing stated Income loans and the clientele mix they’ve had in the past.
Number 2 – The loan terms and conditions
The next obvious thing to look for would be the loan terms and conditions offered by your lender. Ask around, compare, and choose the one who’s providing you best deals. Remember that best deals needn’t necessarily mean deals which are the cheapest. It could mean working with a lender who has a good experience and is also providing reasonable rates, terms, and conditions. Do not make the mistake of blindly going ahead with a lender just because he’s offering you the lowest price in the market.
Number 3 – Down payment of the loan
Some lenders lending stated income loans could get really greedy and demand more than 30% down payment. In such a case, take a step back and analyze if it really makes sense for you to purchase that loan. A decent down payment would be 20% of the property value.
Number 4 – Closing costs, prepayment penalties, and other related expenses
Sometimes, the terms and conditions, the down payment, the experience of the lender may all make you want to finalize on a particular lender but do not jump the decision unless you’re aware of all the expenses in relation to loan processing. Ask about every single type of payment your lender will want you to incur including but not limited to closing costs, prepayment penalties if any, and other loan processing related expenses like – documentation fees, loan processing fees, and every additional payment related to your commercial real estate loan procurement. Only once you have a clear picture of your overall costs of procuring a loan, finalize your decision about a lender.
Number 5 – Ask for client testimonials
Last up on the list would be the customer testimonials provided. Some borrowers readily put it out on their websites which makes the job easier for you. However, with others who do not, you might have to ask for it politely. There is nothing wrong about wanting to know what the previous customers have got to say about a lender.
Remember checking reviews on Amazon before buying some products or checking reviews about a movie or even a Netflix show? This is no different from those.
In fact, this is even more important because you’ll be shelling way more money here. Remember that a genuine and authentic private money lender will have no concerns on this and would be glad to fetch you some customer testimonials.
What’s a better way of knowing how excellent service is than ask the ones who’ve used the service? So, drop your inhibitions and ask for Customer testimonials as the last step to making your end decision.