Working with Stated Income Commercial Loans

Stated income commercial loans provide a way for lenders to meet the needs of certain unique types of borrowers. These borrowers are the self employed and small-business owners. These borrowers often have difficulty qualifying for traditional commercial loans.

A key factor in traditional lending is income verification. Loan officers are usually required to verify employment and income. Most loan applications grant lenders permission to contact their employer to verify employment. Additionally, a lender may also require a copy of pay stubs or W-2s. For individuals with traditional employment, these requests do not pose a problem. However, this is not true for small business owners and other self-employed individuals. Many are very credit worthy. However, they often do not have the ability to provide independent third party verification of employment or income. Most do not receive W-2s. Some may even generate substantially all of their income from cash payments. Based on traditional lending practices, these borrowers do not qualify for commercial loans. Stated Income loans can provide a solution for these borrowers. Many are able to qualify for these types of loans.

What Are Stated Income loans?

As the name suggests, stated income loans are loans that do not require income verification. They are also sometimes referred to as "No Doc" loans. In lieu of income verification, the lender uses other information to determine the borrower's ability to repay the loan. Although the name seems to suggest that you don't need proof of income, you will need to provide financial information. The lender may require copies of tax returns and bank statements. Small business owners may be required to provide several years of profit and loss statements. These documents can provide an indication of your ability to repay a loan. A good credit score is essential. It provides further evidence of your credit worthiness.

Unscrupulous Uses of "No Doc" Loans

In the past few years these loans have received a lot of bad media coverage due to poor lending practices and unscrupulous brokers. Some brokers deliberately overstate the borrowers income to obtain their business and collect a commission. To further complicate matters, some of these loans were sold to other financial institutions without full disclosure. The abuse of these types of loans is a major factor in the housing market collapse. Although some lenders stopped offering these types of loans, they are still available.

Risky Nature of State Income Loans

Since stated income loans require less information from borrowers they are considered more risky. Whenever a lender assumes more risk it is reflected in the fees and the interest charged to the borrower. The lender wants to be compensated for potential higher default rates and collection costs. These costs are passed on to the borrowers. Therefore, these loans will generally request above market costs from the borrowers in order to attain them.

Individuals who are considering a stated loan need to weigh all of the pros and cons. Consider all of the requirements of these loans as well as the cost. Although stating your income seems easy enough for these types of loans, it does not mean that there other more demanding qualifications required in order to be approved for the loan. For the right borrower, these loans can provide a much needed capital to grow or expand a business.