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

Trust Deed Vs Mortgage Nevada

LTV is the percentage of the loan to the property value.

Double check the documents for clerical or mathematical errors. There are different construction loans that can be invested in. _ A trust deed broker often charges investors no fees. At this time, a Temporary Restraining Order will be set in place and will delay the trustees sale until the state court can determine whether or not a preliminary injunction will be granted, until a trial or a full hearing can take place regarding the matter.

At the same time every month, statements and a check that covers the interest earned throughout the month are mailed to the investor(s).
A bankruptcy petition that is filed in a federal bankruptcy court before the foreclosure sale of property stops the trustee, in a foreclosure process, from selling the property until the automatic stay is lifted. Therefore, in order to obtain this priority, this needs to be verified before the closing of escrow. Due to the fact that escrow usually involves the transfer of an investment in land, all conditions regarding the transfer need to be in writing. Prior to the hiring of a control company, its disbursement policies must be looked into.

This protection is made possible by the coordination of project funding with the lender.
Almost any problem can be rectified; its only a matter of money. Keep all documents and important papers that describe, and provide evidence and security for the loan, in a safe and accessible place. The reason is because the original note is not a recorded instrument, like the trust deed. Remember, all things being equal, the greater the Loan to Value, the more risky the loan. Each month, the loan servicing officer bills the borrower and collects payment, depositing the funds that are received into the account of the investor.