Property Investors Have New Finance Options
Introduction
Tax returns can be a dealbreaker for some property investors as all traditional commercial mortgage lenders will require them as a basis for their loan’s approval.
Because of this major pain point, investors and small business owners are in need of alternative or asset-based financing. Prospective borrowers, in many cases, may not have to provide tax returns and other types of documentation to get qualified for financing. In fact, they will have a better chance of closing their loan transaction with a non-bank lender like Silver Hill Funding which offers a Lite Doc solution.
But that’s not all. Understanding the different types of reduced documentation solutions available will help investors determine what best – meets the greatest number of needs.
Here are some key questions and answers regarding light or reduced documentation commercial loans. Investors may want to keep these in mind when struggling to meet bank documentation requirements.
1) Why Do Lenders Require Tax Information?
Basically, tax returns help lenders gauge all sources of the borrower’s income, verify their revenue, track any business losses, and determine the applicant’s overall eligibility for the loan. This works in the best interest of traditional lenders who seek to guard against fraud and ensure their borrowers are fully able to repay the loan amount plus interest.
2) Why do Borrowers Struggle to Provide Tax Returns?
Small business owners and investors often have difficulty producing the amount of documentation traditional lenders require, though not always for the same reasons.
Maybe the most common issue has to do with the tax write-offs real estate investors and self-employed professionals can take advantage of each year. The way these borrowers report on their income can negatively impact the DTI (debt-to-income) calculation a lender is likely to run when qualifying financing requests.
But potential borrowers have other reasons for fretting against tax return requirements. Some have experienced substantial fluctuation with their business profits that is not reflected on their latest tax return, while others would simply prefer to provide as little as possible when seeking a loan.
3) What is the relationship between documentation and monthly interest rate for commercial loans?
More documentation paints a great picture of trust and ability to repay. The general rule of thumb: the more documentation borrowers are willing to provide, the more likely they will be to secure the lowest possible interest rate for their commercial property loan.
Every piece of additional and verifiable information helps a lender feel more confident about their approval decision. It reduces risk in the traditional lender’s eyes. With less risk, the lender can offer a more attractive solution for investors.
Non-bank lenders in the small-balance commercial arena recognize the demand for alternative solutions that allow a greater number of investors and business owners to get approved for financing. As a result, lenders have begun to offer reduced documentation or stated income solutions with competitive pricing. While these loan products can’t match full-doc alternatives when it comes to rate, they offer more overall value for a wide range of today’s borrowers.
4) What are Common Reduced Documentation Loan Options?
More than likely, traditional lenders, like banks, will offer only full documentation loans. On the other hand, non-bank alternative institutions can offer a range of solutions based on the amount of information a borrower is willing to provide.
- Stated Income Loans: Private, or hard money, lenders usually offer this type of financing. The underwriting for stated income solutions normally involves a review of the borrower’s credit and the subject property’s cash flow. These types of loans often close in a short period of time and carry the highest interest rate of all other solutions.
- Light Documentation Loans: This a blanket term that describes a wide range of solutions offered by non-bank lenders. Lenders will review some combination of the borrower’s credit and their property’s cash flow and appraisal.
- Bank Statement Loans: A smaller subset of commercial lenders offers an additional alternative solution that allows business owners to qualify for financing via business bank statements. This is often a preferable solution for owners who feel as though tax returns don’t tell the whole story of their business’s success.
- For example, Silver Hill Funding, LLC offers a bank statement loan solution that calls for 12 consecutive months of business bank statements instead of tax returns.
5) How Can You Tell Which Solution Best Meets a Borrower’s Specific Needs?
No two situations are the same. It’s vital for lenders to analyze each client’s request on a case-by-case basis to point them in the right direction.
What's Next?
If you would like to know more about this type of lending and have a transaction that you would like considered, you should complete the short form and let the lender explain your specific options.
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