Lending Changes: Stated Income Documentation Comes to Commercial
For a while now I've written about the latest "change" in commercial lending: "The Small Balance Commercial Lender." These guys are re-writing the rules on commercial loans that are less than Million. While this might not impact your business immediately if you are dealing with larger properties, it will eventually affect you because of something else they are doing:
Stated Income or EZ Document Loans
Commercial lending, with the exception of private money loans, has been strictly a "full document" underwriting proposition. This meant that the borrower had to show up with a mountain of paperwork including personal tax returns, business tax returns, and financial statements in addition to the documents related to the property such as the leases, rent roll, and income and expense history. And in the end, the lender would underwrite the loan based entirely on the property's cash flow, ignoring the borrower's income, anyway!
These new lenders are willing to take into account the borrower's free cash flow on a stated basis, and make their underwriting decision using the borrower's credit score, the property's cash flow, and the borrower's reserve liquidity. This is unprecedented in commercial lending and will most likely force conventional lenders to come up with competing programs in the near future or they will lose too much loan volume.
Another consideration is that the investors who buy these loans will most likely increase their loan amounts in the future if they have a good experience with the smaller loans. Why wouldn't they? It costs as much to underwrite and fund a Million loan as it does a 0K one, yet the return is 10 times as much. This will put even more pressure on conventional lenders to create some kind of competing program or sell the same programs from the same investors.
So my personal take on the situation is that there will be some significant changes in the loan marketplace if the Small Balance Commercial Lender has a winning formula. They are too new to have any real experience in a down market and I'm sure that the conventional lenders will be watching them closely.
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