Stated Income Commercial Mortgage - Insanity?

by : jeff rauth

Commercial Stated income loans may not require tax returns, but this is not the 'wild west' of commercial lending. There is a solid underwriting formula behind this commercial mortgage.

The decision to fund is not just based on credit scores and what the borrower states their income as, but rather what the lender believes the property would rent for, in the open market, in case of borrower default. The appraisal confirms this. Market rental rates are thoroughly discussed in the income approach section of the appraisals report.

Essentially, the lender is trying to confirm the property, rented out, would hit the Debt Coverage Ratio required. This ratio for most lenders that offer these programs is a conservative 1:1.3. In other words, the net rental income would have to be $1.30 for every $1 of proposed mortgage debt.

So, after all expenses, like real estate tax, property insurance, management fees, repairs and mortgage payments have been made, the property would still have $.30 left over.

This is the main underwriting consideration. Lenders still consider credit scores, what borrowers 'state' as their personal and business income, among many other details, but the DCR is most important.

An interesting distinction here, is that the focus on the appraisal for potential rental income (income approach), often lowers the value on most owner occupied properties. This is due to many specialized features that may have tremendous value to the existing user, or other business in their field, but may have little value to a general tenant. A common example of this is lab space in light industrial buildings or expensive build out in a restaurant.

So, if the loan to value is high to begin with, off of a more balance opinion of value, the loan to value and debt coverage ratios will be off balance with the focus on income only; and consequently the deal may become un-fundable under the focus purely on the income approach that stated income loans depend on.