Turndown Series, Volume 4: What Are Some Alternative Ways to Qualify for a Commercial Real Estate Loan?

In this series of articles, David A. Krebs (a licensed mortgage broker specializing in helping people who were "turned down" by banks) explores how borrowers can get approved for a loan by an alternative lender regardless of their situation.

As discussed in Volume 2 of this series ("Was Your Business Loan Application Denied?"), it is common for business owners to be turned away for loans by their banks for various reasons such as insufficient credit history, poor quality of earnings, or too much debt.

If you are looking for a commercial mortgage loan, but were unable to satisfy your bank's requirements, there are many alternative options for you. Other lenders offer programs allowing your business to qualify in different ways.

These alternative programs vary based on the level of documentation that the lender requires from you to qualify for the loan.

We highlight 5 of these programs below.

#1: COMPLETE DOCUMENTATION PROGRAM ("FULL DOC")

Who this program is for:

• This program is suitable for creditworthy investors or business owners looking for an alternative to restrictive bank financing but seeking bank-type rates.
• These borrowers typically are the “near-misses” who fell just outside bank guidelines and were rejected by banks.
• Or, some borrowers simply choose not to work with traditional banks because they need greater flexibility (such as faster closing times or higher cash-out amounts).

How this program works:

• You provide a full package of financial information, including tax returns and financial statements.
• Specifically, you can expect to be required to provide the following documents: (1) tax returns (usually two years); (2) credit report; (3) operating statement, profit and loss statement, or balance sheet; (4) rent roll and leases if applicable; (5) purchase contract if applicable; (6) personal financial statement; and (7) other documents if applicable, including vesting map, debt schedule, capital expenditure schedule and deferred maintenance schedule.

#2: LIGHT DOCUMENTATION PROGRAM ("LITE DOC")

Who this program is for:

• This program is for investors who may not be able to disclose certain financial information or whose properties are more valuable than a tax return might show.
• For example, these borrowers typically show losses on their tax returns.

How this program works:

• Compared to the full doc program, you provide less documents and you do not have to provide any tax returns.
• Instead of tax returns, lenders rely on your operating statement and rent rolls.
• The lender may also require a credit report, personal financial statement and other schedules (debt, capital expenditure, and deferred maintenance).

#3: BANK STATEMENT PROGRAM

Who this program is for:

• This program is geared toward business owners who prefer to prove their income by providing consecutive months of business bank statements instead of tax returns.

How this program works:

• You provide business bank statements (usually from the past 12 to 24 months), and the lender analyzes the deposits and expenses to see if your business has enough income to qualify for a loan.
• The lender may also require a credit report, personal financial statement and other applicable schedules (debt, capital expenditure, and deferred maintenance).

#4: STATED INCOME PROGRAM

Who this program is for:

• This program works well where the business owner has difficulty documenting the company's income for traditional lenders.

How this program works:

• The benefit of this program is that you do not have to provide tax returns to prove income.
• Instead, you state your income on your loan application (hence, why these programs are referred to as “stated income” programs) and there is no further income verification required.

#5: ASSET-BASED PROGRAM ("HARD MONEY")

Who this program is for:

• This program is for borrowers seeking financing based solely on the value of the property.

How this program works:

• Hard money lenders are private individuals or companies. Compared to regular banks, which focus primarily on your credit history and income, hard money lenders focus mainly on the value of the real estate that will serve as the collateral for the loan.
• Because there is less paperwork involved, these loans typically close faster than the options listed above. The tradeoff, however, is higher interest rates.
• These loans are often used as short-term bridge loans, usually one to five years.
• Hard money loans are most commonly used for investment purposes where you will not be occupying the property.
• Hard money loans, less commonly, are also available if you are looking to buy a property in which you will actually run your business.

Conclusion

The alternative lender programs listed above are diverse as well as flexible. The different levels of documentation required by alternative lenders fall on a very wide spectrum. It is therefore possible for your company to find a comfortable place on that spectrum and qualify for a loan.

A mortgage broker can help you find the needle in the haystack by contacting multiple lenders, wading through the different loan programs and getting down to the nitty-gritty of the particular guidelines. The ultimate result is matching your company with a lender who concludes you qualify for a loan.

David A. Krebs is a licensed mortgage broker offering commercial and residential loan programs beyond your regular bank. Call us at 321-239-2781, click here to submit a message, or click here to book a free consultation. Learn more at our website here.