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

How To Deed Of Trust

(Note: Keep in mind that each state may have their own process of foreclosure, so the following information may not apply to your area)1.

Completion and handing over of the deed of trust or promissory note, or the completion and handing over of the endorsement or assignment of the promissory note. A closing statement will be sent to you, which describes how and to whom the documents and funds were distributed. 00 would become 63. If the investor has the first deed of trust, then there will be no other lien before theirs. Before a loan is granted, a Coppercrest Funding officer will perform a personal inspection of all subject properties.

Even promises made orally should be written down.
Understand loan servicing authority, provisions and compensation. Borrower is a non-profit organization (ex: churches, charities, etc. However, regardless if you are loaning money on real property as security, or are investing in a deed of trust, the documents you would require for both are the same; you would require the trust deed and the note. A trust deed investor always needs a title insurance policy.

The interest rate paid by the borrower is typically higher than rates paid by banks.
Even though each policy works in the best interest of the investor, ALTA is still considered to be the best choice among the two, and is something you should keep in mind when selecting a policy. (Note: Keep in mind that each state may have their own process of foreclosure, so the following information may not apply to your area)1. With this type of documentation at their disposal, the company in question can have complete control and account for construction funds from the start of the project until completion.