Stated income commercial loans have been a decent option for borrowers that do not show enough income on their tax returns to qualify for bank financing. These loan programs allow the borrower to “state” both their personal and business income, though the level of documentation varies from one lender to the next. In addition stated income commercial loans can be especially attractive to businesses with a cash component (like restaurants, automotive repair, etc) that enables them to get long term fixed rate financing with higher leverage and longer amortization periods than normal.
As mentioned, the level of “stated” varies from one lender to the next. For example, on investment properties some lenders would still ask for all leases, rent rolls, year to date financials, personal financial statements, etc. but would not ask for personal tax returns and or real estate entity tax returns. On owner occupant transactions, business tax returns may not be required though personal tax return would be as well as, proof of insurance, copy of existing mortgage statement, would still be required. There are a few lenders out there that design the loans to be more as the name implies, and require virtually no documentation, though the borrower pays for this in the rate and prepayment penalties. In general the less documentation asked for, the more expensive the transaction for the borrower.
Amortization schedules of 30 years are not uncommon. Compared to the typical bank loan at a 20 year schedule this saves the borrower cash flow by spreading out the loan. Fixed periods comparable to residential loans, like 30 years, 15, 10 and 5 are often available. In contrast most bank loans do not go beyond 5 year fixed sometimes 7 years but that is rare.
There is a harsh provision in most bank loan documents. It’s referred to as the “call provision”. It gives the bank the right to call due the borrower’s loan whenever and for whatever reason the bank feels justified – even if the borrower is not in default on their loan. Although hard to believe this clause is in virtually every bank mortgage. In short it helps the bank protect their investment and allows them to “pull out” if they lose confidence in the borrower’s ability to keep the business going/paying their loan. This clause not included in stated income loans.
No reporting to the stated income lenders after the loan closes. This ties into the above, as most banks will require monthly or quarterly statements. If from the financials they see a negative trend they hold the right to call the note or change the terms of the deal.
The two obvious negative features of these loan programs include higher rates and expensive prepayment penalties. Rates are normally app. 2% above comparable banks rates though exceptions can go in both directions. A few lenders are closer to roughly 1% over and with the longer amortization schedule the borrower can enjoy a lower monthly payment when compared to bank financing. On the other side, the rate can be double digit for borrowers with poor credit and special use properties.
Prepayment penalties can be brutal with this loan. Typical bank pre-pays are often 3% for 3 years or an annual step down like 5%, 3% 1% as in the case of the SBA 7a loan. It’s not uncommon for the stated loan to be as high as 10% for 10 years. On top of that some lenders demand lock out periods of 3 to 5 years.
Borrowers should take their time evaluating their options, and pay attention that their planned holding period matches the fixed rate and prepayment penalty period. Also, this sector of the industry has been taking it on the “chin” with the credit crisis and the makeup of this loan program continues to evolve. Borrowers may want to look at the SBA 7a program as future income projection are allowed as well as DCR are low as 1.1 are permitted as well. Take your time and evaluate all your options as you do not want to make your situation worse by going with a stated income commercial loan that’s not a good fit for your situation.