Background: Our advisor consults one of our small portfolio lenders to discuss the financing of a 15 unit apartment building. Using their underwriting guidelines, the property most likely qualifies for up to a $960,000 loan amount. However, after performing an in-depth analysis of tax returns, bank statements, and the credit report, it appears that a “full documentation” approach was not the best option. Our advisor then took this opportunity to educate the customer.
Full Documentation vs. Stated Income: In the mortgage industry, these are two primary approaches to underwriting loan requests.
This approach requires that the borrower provide extensive personal financial information to the lender, including: tax returns, bank statements, credit reports, business P&L (if self-employed), W-2 info, Form 4506-T, mortgage statements (where applicable), letters of explanation (where applicable), and documentation as requested by the lender.
This approach is specially designed for self-employed borrowers who may own a business. Since most self-employed borrowers typically try to minimize their taxable income by using depreciation, amortization, and other non-cash deductions in addition to business expense deductions, their tax returns may not fully reflect their available cash flow. In such cases, a Stated Income approach may work best, since lenders rely so much upon borrower(s) tax returns when performing a cash flow analysis. Stated Income does not require tax returns. W-2 info, bank statements, or even lease agreements. Some lenders may require a Business P&L, but they do not conduct any verifications of this info.
The chief difference between Full Docs vs. Stated Income programs is that the overall documentation and verification process is minimized in a Stated Income program. Some lenders may also refer to this type of approach as Low Doc, E-Z Doc, Express, or a myriad of other marketing monikers. Based upon the fact that they owned a business, and that they were using a lot of their capital to grow the business, our Advisors recommendation was that they stick with a Stated Income approach. This was found to be the best financing solution for this specific situation. If we were to use a Full Doc approach, there was a high probability that our loan request would not have been granted. Even if it were granted, the loan amount would most likely be lower than if using a Stated Income approach.
Within the pages of the links below our Advisor identified two lenders that were players at that time in the market, United Commercial Bank and East West Bank, which featured Stated Income loan programs. The chief difference between the two, aside from rate, was that UCB was more probable to offer a higher loan amount than East West due to their underwriting approach, which was based on Forecast rents versus Actual Rents.