Commercial stated income loans can be a viable loan option for owners that have had difficulty being approved by typical banks. As the name implies, these commercial loans require less documentation than normal, giving the borrower the opportunity to "state" their personal and business income. For many borrowers that have a cash component (restaurants, automotive repair, etc) or borrowers that overstate expenses on their tax returns this loan can solve the issue of not having enough reported income to qualify under traditional loan guidelines.
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There is more than one layer of stated. Different lenders require various amount of documentation. Some require all documentation other than business tax returns. For example, on investment properties all leases, rent rolls, year to date financials, personal financial statements, etc. would still be required. Other lenders design their loans to be more as the name implies and require virtually no documentation.
As less documentation is required the more expensive and harsher the terms are for the borrower. Stated Income Commercial loans have both positive and negatives features.
The Good
Besides simply being approved for a commercial loan, there are a couple of interesting components of this program. The more significant are below.
1. Longer than normal amortization schedules. 30 years is common. Compared to the traditional 20 year schedule this increase reduces the monthly payment for the borrower.
2. Longer fixed periods. Fixed periods up to 30 years and everything in between are available.
3. No "call provision". Traditional banks normally require their borrowers to sign off on this provision that gives them the right to call the borrowers loan whenever and for whatever reason the bank wants - even if the borrower is not in default on the loan. This may be hard to believe but this provision is tied into almost every commercial mortgage. For example, here in Michigan as our local economy worsens many banks want out and "call" loan due on business and or building types their worried about. This provision is not included in stated income loans.
4. No "right to offset". The right to offset is equally harsh but applies to businesses that have both a commercial loan and deposits (business checking/saving account) with their bank. This provision gives the bank the right to go into the borrower's checking account and take out cash to offset any balance due to the bank. This normally occurs at the worst time for the borrower - right when their having difficulties. This provision is not included in stated income loans.
5. No ongoing reporting. This ties into 3 & 4 above as traditional banks require ongoing reporting to protect themselves. It is not uncommon for banks to ask for quarterly or even monthly financial statements. There are normally no reporting requirements on stated income loans.
The Bad
By far the two most negative features of this loan are the rates and the prepayment penalties. Interest rates range from 1.25% - 6% higher with this loan. This is due to the increase risk the lender face as well as the lowered level of competition among lenders. Borrowers that are able to document more and have strong personal credit scores will enjoy the lower side of the range.
Prepayment penalties are high with these loans. While a traditional bank will still demand prepayment penalties, they will normally ask for only 3% for 3 years or there about. Stated income lenders will ask for as much as 10% for ten years. In addition, some lenders require lock out periods of 1 to 5 years. This is a harsh term that means that if the borrower were to sell or refinance before the lock out period ended, the lender would be owed all the interest that would have been earned. Said in another way, if you were 1 year into a 5 year lock out and sold your property you would owe 4 years worth of interest...
Commercial stated income loans can be a viable option, but borrowers should take their time in evaluating them to make sure that they are not worsening their situation by going forward.
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