7 Steps to Loan Approval
Steps to Private/Hard Money Loan Approval
Let’s take a look at the 7 KEY steps to guaranteed success in your loan approval process:
Step 1- Know Your Success Formula
When you meet with a lender, you should have your project mapped out in full detail with a profit forecast and exit strategy. Real estate investors often use a rigid formula of ’65-70% of ARV (after repair value) minus rehab costs” to determine the maximum purchase price for a property. This is a good formula to utilize as a first step when considering a purchase. You should also focus on what type of project best fits your skills and knowledge (ground-up construction, single family residential, cosmetic vs full rehab, etc) and your exit strategy (fix & flip, fix & rent, etc). The more defined your success formula is the more likely you will be at profitably executing when acquiring, rehabbing, and selling a property.
Step 2- Prepare an Executive Summary
An executive summary is a short write-up that outlines the key components of your project including: amount of loan request, reason for loan request, purchase price, closing date, timeline of project, how much cash you (the investor) will have in the project, and the exit strategy. The executive summary should be no more than a 1 page outline detailing the above items and shows the lender that you have solid plan in place.
Step 3- Loan Application
A loan application provides the lender with info about your project as well as you, the borrower. Most lenders heavily underwrite the property while also evaluating the borrower. This is done to ensure the borrower has the capacity to repay the loan if they end up having some challenges or delays with their project. The lender will often review a borrower’s credit, cash liquidity, financial portfolio (including any real estate owned), experience, etc. Providing a detailed and accurate summary of your financial status will improve a borrower’s chances of securing a loan.
Step 4- Comparable Sales & Pics of Subject Property
Lenders like to see that the borrower has done their own due diligence. A key component to any project is the estimated ARV (after repair value) and performing a comparative market analysis. Do not rely on a wholesaler’s comps!!! If your estimated ARV matches the lender’s, that makes a good impression. Good pictures are very helpful in determining the condition of the property and repairs needed. Don’t forget to provide pictures of the surrounding homes and neighborhood.
Step 5- Contractor Estimate and Scope of Work
Have your contractor provide a detailed cost breakdown for rehab and repairs. It is to your advantage to have a firm estimate in hand before ratifying a purchase agreement. Also include a detailed draw schedule of the projected work, as well as the cost and timeframe.
Step 6- Bring Something of Value to the Table
Most lenders will require some “skin in the game” from the borrower. That “skin” usually comes in the form of cash (10-20% of purchase price) and can also include cross collateral. The more liquidity a borrower has the less risky the loan will be. Make sure to include all liquid assets on the loan application. If you are lacking in cash, partner with somebody that does.
Step 7- Perform!!!
Performance does not just mean making payments once the loan is in place. Your performance beginning with your very first contact with the lender is critical. It is crucial that you communicate well (timely and organized with transparency and integrity). The lender will make very fast judgements about doing business with you based upon things such as:
· Promptly returning phone calls and emails
· Answering all questions truthfully and fully
· Staying organized and providing all requested documentation quickly
Once you have an active loan, continue performing by making payments on time and staying in close contact with your lender to increase the chances of working with that lender on your next project. Your relationship is everything!