In today’s market, securing capital for commercial property investments can be tricky. Both investors and the banks that support them have had to innovate their borrowing and lending practices to find methods to circumvent the old ways that are often too stringent. Old-fashioned qualified mortgage loans are still favorites for larger banks, but smaller lenders have found that stated income financing can work just as well and enable the lenders to treat the loans as mortgage-based securities. Resell of such loans turns a tremendous business, and that keeps this alternative to traditional mortgage loans rolling.
Advantages
Compared to qualified mortgage loans, stated income financing offers a few advantages. For one thing, there are pretty strict rules for lenders considering approving mortgage loans. Among the issues they consider before granting a loan are proof of income, debt to income ratio, and whether or the borrower is involved in other loans with only interest being paid essentially. With such careful guidelines to follow, these loans are fairly safe for lenders as they can be leveraged for resell and provide certain litigation protections. Smaller lenders hoping to make strides and money with the loan game, though, find that stated income financing offers some advantages, too.
Qualifications
Relying on bank statements rather than tax documents, these loans are often referred to as alternative documentation or asset-based loans. The bank statements help to prove income, and this is the primary concern of the lending institution. With so much riding on what is in the bank, lenders want to see proof that borrowers will be able to repay the loan no matter what the case. With that in mind, they look for liquid assets high enough to presume that 12 months of loans could be paid with the money in the bank. Furthermore, an excellent credit score is crucial, with FICO ratings of above 700 typical. If lenders hope to pay a low down payment, they should expect to provide tax records. Commonly, down payments for such loans run as high as 20-25%.
The lending game has changed a lot over years since the real estate bubble burst and the Great Recession set in. As the economy rebounds, lenders and borrowers seek new ways to connect. These methods may seem unorthodox to some, but they represent a market evolution that will take root over time. Stated income financing challenges many of the foundational standards of the industry, but it also helps to ensure that the industry remains vital and that new investors have opportunities in a difficult market.