Chapter 6 - Loan Underwriting

The underwriting discipline of the lenders is one of the single most important elements when investing in a trust deed. The reason why loan underwriting is so significant to trust deed investing is because part of the underwriting process is to determine the Loan-To-Value Ratio (LTV).

The process of underwriting is what the lender goes through in order to qualify a borrower for a loan, and also makes certain that the loan has been properly documented and structured. The LTV if often determined though the comparison of the loan amount to the appraised value regarding the collateral that secures the loan.

Throughout a loan transaction there tend to be far fewer problems when a loan has been properly underwritten. However, if problems do arise, the borrower is encouraged to set them right should they wish to protect their equity in the project. Almost any problem can be rectified; its only a matter of money.
In the event that the borrower fails to solve their problems, regardless of the reason, the loans margin of equity proves to be helpful as it enables the lender to absorb the cost to solve whatever problems have occurred.

Loan-to-Value


The loan-to-value principal is what makes carrying a high yield with a trust deed investment secure. The reason is because LTV means to loan a percentage of money that is less than the actual property value. When it comes to real estate lending, LTV is the single most important element, because an adequate LTV protects the initial investment, while a remaining cushion of equity helps to pay off any unexpected costs that may occur.

When it comes to loan-to-value ratio, the goal of an investor should always be to try and keep the LTV at the lowest possible amount. For instance, a good rule of thumb that every investor should follow is to never have an LTV higher than 70%. Remember, the lower the number, the more equity the investor will receive on the property. For the most part, when lenders need to analyze a loan situation, they generally rely on appraisals in order to determine their loan-to-value ratio.
Borrowers

Another important aspect of the underwriting process is finding out how the borrower intends to refinance the loan in regard to the loan terms that have been specified in the promissory note. Typically, a lender should want to conduct business with a borrower who has a decent record.

The following is information the lender should take the time to find out about the borrower before distributing a loan, so that the loan can be underwritten accurately

The address of physical property description. This includes the square footage of the land, the description of the building(s) or improvements, operating statements, rent rolls and income property.

The property preliminary title report

If it is a purchase, find out the purchase agreement

Confirmation of the zoning letter issued by the city/county that confirms the zoning for the property.

The corporate papers of the borrower

Phase one environmental report

If the loan happens to be funding a construction or rehabilitation project, the lender will also want to obtain the following criteria:

Breakdown of the construction cost

Agricultural and engineering plans that have been fully approved

Description and site plan of buildings/improvements on the site

Lost Deed Of Trust Bond Form

Find out the experience, knowledge and integrity of the broker with whom the transaction will be arranged or made.

_ The owner of a trust deed is generally first or second in regards to the lien position. _ Divorce _ Unemployment _ Medical emergencies _ Etc. This is a fact you wont want to forget should a tax lien appear. Thus, escrow closes when every condition of the escrow instructions have been met or waived, the documents have been recorded, and the funds have been released. _ Trust deeds, on the other hand, are purchased and sold through brokers, but can also be purchased and sold privately at no extra charge.

That being said, the following is a list of the criteria that is required to be stated within the escrow instructions:1.
Make sure you understand all legalities concerning trust deeds before you make your investment. Keep all documents and important papers that describe, and provide evidence and security for the loan, in a safe and accessible place. However, dont mistake all property that is fastened to the ground to be real property; some of these items are personal. Know your borrowers financial status and their credit worthiness. Know how to recover your investment when the borrower does not meet payment.

Any assignment of the trust deed that is displayed in the policy is valid and enforceable.
Prior to the hiring of a control company, its disbursement policies must be looked into. Preliminary Lien Notice V With a construction loan, most states will require that a preliminary lien notice be sent to the lender, general contractor and owner before, or on labor services or material provided by the subcontractor/material supplier. ) _ Other Liens (property taxes, judgment liens, etc. Make sure you do not want or require any final, additional documentation before you close. The documents can be sent to the unavailable party ahead of time and pre-signed.