How do lenders assess lease income for lease doc loan?

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thomas
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Joined: Wed Jun 24, 2009 4:16 pm

How do lenders assess lease income for lease doc loan?

Postby thomas » Thu Jan 15, 2015 2:02 pm

Hi, I’m a self-employed videographer currently living in a rented apartment in Delaware. On a good year, I can earn up to $60,000 (which is what I’ve been earning for the past two years). I was thinking of investing in a commercial property for my business so I want to take out a mortgage.

A friend suggested me to take out a lease doc loan. While looking into it, I found out that I may be able to qualify for it only if my lease income can cover the interest on the loan. I have no idea how the banks will calculate this. Is there anyone who can explain it to me?

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Otto Dargan
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Re: How do lenders assess lease income for lease doc loan?

Postby Otto Dargan » Thu Jan 15, 2015 4:55 pm

Hello thomas, welcome to the forums.

If your lease income is deemed to be sufficient enough to cover the interest on your loan, then you may be able to take out a lease doc loan without much trouble.

In order to check whether or not it is, the lenders tend to have a look at:
  • The financial strength of your tenant.
  • The remaining term of the lease.
  • The interest cover ratio.
The interest cover ratio is the number of times over that the lease income will cover the interest on your loan. For example, if you apply for a $500,000 loan at an interest rate of 10% and the lender assesses your loan using a buffer rate of 12% then you will need $60,000 in net rent income to qualify for a lease doc loan.

This, if you were receiving $120,000 in rent income from the property then you would have 2x interest cover. It should be noted that most lenders tend to require an interest cover of 1.3x to 1.5x in order to approve a loan. However, few lenders may be able to consider a 1x interest cover if you have a strong tenant and your property is in a good location.

Please understand that a lease to your own business will not be counted as income evidence. This also goes for a lease to a family member’s business or to a related business entity. Lenders want to see a true arm’s length transaction.

Cheers,
Otto
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thomas
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Re: How do lenders assess lease income for lease doc loan?

Postby thomas » Thu Jan 15, 2015 8:40 pm

That sounds reasonable I guess. But what if I can’t qualify for the loan for any reason? What other type of loan can I consider just in case?
Also, I can’t provide all of my financials because of my employment.

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Otto Dargan
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Re: How do lenders assess lease income for lease doc loan?

Postby Otto Dargan » Fri Jan 16, 2015 10:19 am

Hi thomas,

As a self employed borrower who is not able to provide your complete financials, you may also look into taking out a low doc commercial loan.

For this loan, you need to have a registered ABN and sign an income declaration letter, which confirms your current income. You may also need to provide additional documents like:
  • An accountant’s letter.
  • Business Activity Statements (BAS).
  • Bank account statements.
  • A copy of the commercial lease agreement or your rental history.
It should be noted that you may not need to provide any evidence of your income in certain situations.

You can have a look at our website to learn more about this. We can also be reached on 1300 889 743 or you can fill in our free assessment form and one of our experts will contact you instead.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

thomas
Posts: 64
Joined: Wed Jun 24, 2009 4:16 pm

Re: How do lenders assess lease income for lease doc loan?

Postby thomas » Fri Jan 16, 2015 12:06 pm

Cool. Thanks a lot for all your help, Otto. I’ll have a look at your website for now and will give you a call after I’ve given it more thought. Have a nice day.

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HelloKitty
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Re: How do lenders assess lease income for lease doc loan?

Postby HelloKitty » Wed Apr 01, 2015 11:04 am

Hi everyone!

I have a friend who had previously taken out a commercial property loan. Because I’m thinking of doing the same, I asked him a few things about it. While talking, what seemed most peculiar to me was that he said that his purpose of taking out the loan was taken into consideration. He failed to explain it further so I’m here to get it cleared up.

I’d appreciate it if anyone could help me understand this.

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Otto Dargan
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Re: How do lenders assess lease income for lease doc loan?

Postby Otto Dargan » Wed Apr 01, 2015 3:15 pm

Hi HelloKitty,

The purpose of your commercial property loan will affect how your loan is assessed. If your are taking out the loan for:
  • Investment purposes like buying or refinancing a commercial property that will be leased, then it is likely to be considered a low risk.
  • Owner occupancy, e.g. to buy or refinance a commercial property that is leased to or occupied by your own business, then it is likely to be considered a medium risk.
  • Working capital, i.e. financing the day to day operations of your business or liquidity shortfalls, then it may be considered high risk.
  • Other purposes i.e. all other commercial, business, or investment purposes, then it will be considered on a case by case basis.
It should be noted that loan purpose is determined by what your loan is used for, and not by what your loan is secured upon.

You can call our office to get a clearer understanding.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

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HelloKitty
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Re: How do lenders assess lease income for lease doc loan?

Postby HelloKitty » Thu Apr 02, 2015 8:18 am

Ah, now it makes sense. Thanks for your prompt and precise answer, Otto. I had a look at your website and it’s great! It helped me learn a whole lot more. I’m planning on giving you a call by the end of the coming week to discuss things in detail. Bye.


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