One of the hardest jobs that a loan broker has is "matchmaking" their client's loan request with the right funding source. Additionally, one of the biggest setbacks to closing loans quickly is having a lender decline a loan, requiring that the process begin again with somoene new. With these two challenges in mind, you can see how vitally important it is for the broker to understand the client's loan scenario, as well as potential lender's guidelines for approval as early as possible in the process.
While each loan may be different, and have its own intricacies, there are three basic areas that should be understood, and vetted quickly. These are sometimes referred to as the "3 C's" of lending.
Collateral Coverage
In most cases, collateral will be the residential or commercial real estate that the loan will be secured with. Apartment buildings, strip centers, single family homes, commercial buildings, lots and land, etc. Because the collateral is essentially the lender's guarantee that their loan will be repaid in the event of a default, this is an area that needs to match carefully with the lender's criteria. Items to gather that will help the lender detemine if the client's collateral is acceptable include the following:
- Prior Appraisal Reports or Valuations
- Environmental Surveys or Testing Results
- Property Profile and Preliminary Title Report
- Interior & Exterior Photos
Commercial lending institutions generally also like to understand the current use of the property, as well as any alternative uses. Specialty properties can be more difficult to finance, so be sure and discuss this topic if your client's collateral is unusual or has any characteristics that might deem it less desirable for any reason.
Credit Condition
Credit histories and scores can largely vary from borrower to borrower, and is an area that nearly every lender at least wants to see and understand before approving a loan request. If your borrower has past credit derogatories, such as foreclosures, bankruptcies, short sales, or even late payments, you should be straightforward with lenders about these challenges and explain how they came about. Having letters of explanation for each derogatory item from the borrower will be essential, as well as showing any changes in circumstance since the credit issue that may mitigate the risk for the investor.
On the other hand, if your client's credit is positive, be sure and communicate this to the lender as well. Pointing out strong credit scores or healthy payment history can often help a lender view your client as a good investment.
Cashflow Availability
Whether a borrower has the income and cashflow capacity to make loan payments is another key point that lenders will almost always take into consideration. Be sure to go through all sources of income with your borrower, and have documentation ready to show for each one. Personal and business taxes (including W-2's and/or K-1's), as well as financial statements are a great place to start. Other items like rent rolls and lease agreements will be helpful if there is income from an investment property.
Once all gathered, take time to calculate a couple of key ratios, to know where your borrower stands. A debt service coverage ratio (DSCR) is great for commercial property, whereas a debt to income ratio (DTI) is probably more relevant for a residential home loan. Even though each lender may look at cashflow slightly different from an analysis standpoint, having done your own review of the cashflow situation will better prepare you to discuss the loan scenario with lenders and know whether this area will be a strength or a weakness for your borrower.
Now that you are armed with good information about your client's collateral coverage, credit history, and cashflows, and hopefully have the data and files all organized (Broker Organization Tips found here) it is time to discuss with lenders and obtain feedback. Take your time to outline all relevant info in a narrative form email or submission sheet.
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