Lite Doc Commercial Loans: Most traditional commercial mortgage lenders today require applicants to submit their tax returns to approve their loans.
Investors and owners of small businesses find this a huge pain point. This is also an excellent opportunity to offer real value as a provider of commercial loans.
You’ll be able to close more monthly loans if you identify situations where a potential borrower doesn’t need to submit tax returns or other documentation.
This is not all. You can also learn about the various reduced documentation options available to help you decide when a complete documentation solution, which requires tax returns, meets your borrower’s needs.
These are vital questions and answers about lite doc loans. These questions and answers will be helpful for borrowers who are having trouble meeting bank documentation requirements.
1. Why Do Lenders Require Tax Information?
Tax returns help lenders determine loan eligibility by selecting the applicant’s income sources, verifying their revenue, tracking losses, and assessing the lender’s overall eligibility.
This is in the best interests of traditional banks, who want to protect against fraud and ensure their borrowers can repay the loan amount plus any interest.
2. Why are Borrowers unable to provide tax returns?
Small business owners and investors often struggle to produce the documentation that traditional lenders require. However, this is not always the case.
The most common problem is the tax write-offs that self-employed professionals and real estate investors can take advantage of each year. These borrowers’ income reports can hurt the DTI (debt to income) calculation that a lender will likely run when approving financing requests.
Prospective borrowers may have other reasons to be wary of tax return requirements. Some have seen significant fluctuations in their business profits, which are not reflected in their most recent tax return. Others would prefer to give as little information as possible when applying for a loan.
3. What is the relationship between monthly commercial loan interest rates and documentation?
The general rule is that the more documentation borrowers provide, the higher their chances of getting a commercial loan at a low-interest rate.
Every additional information can help a lender feel more confident in their approval decision. A less risky lender can offer a better solution to a potential borrower.
Nonbank lenders in small-balance commercial lending recognize the need for alternatives that will allow more investors and business owners approval for financing.
Lenders have offered lower documentation and stated income solutions at competitive prices.
These loan products are not as competitive as full-doc alternatives in terms of rate but offer more excellent overall value to a broad range of borrowers.
4. What are the Common Reduced Documentation Loan Options
Banks and traditional lenders are more likely only to offer full-doc loans. Nonbank alternative institutions, on the other hand, can provide various solutions depending on how much information the borrower is willing and able to provide.
- Obtaining a loan for stated income: These loans are usually offered by hard-money lenders or private lenders. Underwriting for stated income solutions usually involves reviewing the borrower’s credit score and the property’s cash flow. These loans are typically short-term and have the highest interest rates.
- Lite Documentation loans: This broad term refers to various nonbank lending options. Lenders will review the borrower’s credit, their property’s cash flow, and appraisal.
- Business Bank Statement Loans: This alternative option allows owners of businesses to apply for financing through their bank statements. This option is often preferred by owners who feel that tax returns do not tell the entire story of their company’s success.
- Silver Hill Funding, LLC, for example, offers a bank statement solution that requires 12 consecutive months’ worth of bank statements to replace tax returns.
5. How can you tell which solution is best for a borrower?
There are no two situations the same. Good commercial mortgage brokers always consider their client’s unique circumstances to find the best solution.
It is essential to review each request individually. You can improve your skills by reading our Definitive Guide to qualifying commercial loan deals.
The key to finding the best solution with minimal documentation for your borrower is your understanding of their needs and your familiarity and knowledge about the market.
For more information about Silver Hill’s nonbank loan solutions, visit our Program Overview Page.