“Stated” Income Commercial Real Estate Loans are Back—and Better
Do you have clients looking for “stated” income loans on commercial property? They’re available again in 2015 and, this time, lenders swear they’ll do them right.
Like so many other loan programs real estate finance professionals relied on in the recent past (notably sub-prime and alt-a), “stated” in – come commercial real estate loans were a casualty of the 2008 mortgage meltdown. Soon afterward, mortgage brokers who had previously em – braced them for their fast-and-easy closings wouldn’t even utter the term “stated,” it had become so taboo. Trouble is, prospective commercial real estate buyers and their agents loved the loans and have been praying for them to come back.
And why not? Prior to ’08, when commercial lenders were ramping up their sales volumes to compete for big securitization dollars, borrowers could simply state their personal and property income in lieu of revealing inferior debt-service coverage ratios. Lenders became overly comfortable relying on stated income instead of verified data, and gradually even low ered borrower credit score requirements to imprudent levels. Un – fortunately, we all know how that story ended. Yet today, in 2015, the good news for borrowers and their commercial real estate agents is; “stated” commercial real estate lenders are coming back into the market, bit by bit. And the good news for all of us is: It looks like, this time, they’re doing it right.
A Different Animal
To better understand what has changed since 2008, let’s look at the loan product itself; for when it comes to commercial real estate loans, the “stated” product offering has always been a horse of different color. With a “stated” loan, a tangible income- producing property has almost always been required to support the “Stated” Income Commercial Real Estate Loans are Back—and Better by Noah Grayson borrower’s repayment ability; lenders have rarely relied solely on a loan applicant’s personal income numbers, stated or otherwise. Regard – less of whatever income a borrower generates personally, a “stated” lender wants to see that income produced by the property itself is superior to the mortgage payment and its associated expenses. At the very least, that ratio of property income to property expenses—what’s known as the debt service coverage ratio— must be break-even.
Trusting the Data Benefits the Borrower, too
You may think that today’s stated commercial real estate lenders are once again taking the borrower’s word for their numbers but, this time, lenders are relying on bona fide figures and accurate data to support loan decisions. In addition, they are requiring strong borrower credit scores and verifiable track records of on-time mortgage payment histories.
So, what’s so “stated” about these new loans? Personal income. As previously, the lenders are allowing borrowers to state their personal income on applications. Those statements do not require verification, and tax returns do not need to be provided for the loan underwriting process. A third-party appraisal is ordered to verify, in addition to the property value, the market rent received from the property, the occupancy of the property, and that executed leases are in place. The lenders are, ostensibly, waiving personal income scrutiny because, in actuality, they are using the borrower’s credit history as a determinant of ability to repay debt and meet financial obligations. In other words: these lenders believe that any commercial property investor or business owner who has weathered the Great Re – cession and emerged with a glow ing credit history is a good risk.
A Powerful Tool for your Agent’s Toolkit
All of this means that the next time a commercial real estate buyer or borrower asks you about a stated loan, you’ve finally got real options to offer, so respond with this valuable information: Currently, for a stated commercial real estate loan, 25 to 35 percent down is required for purchase, plus a credit score over 650 and a track record of on- time debt repayment.
Do commercial real estate lenders now have a winning formula for “stated” borrowers? Will they stray from their new, sturdier parameters? Only time will tell. The only certainty is that, as always, the race for big securitization dollars will intensify quickly and the competition won’t sit on the sidelines for long.
By Noah Grayson