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

Transfer Deed From Individual To Trust

) _ Other Liens (property taxes, judgment liens, etc.

As you can see there are many legal issues for investors to consider before they invest in a deed of trust. ) if they fail to pay the loan. Another reason is the borrower destroyed the property value by removing or demolishing the building(s), or by failing to keep the property in top condition.

This clause indicates that full payment of the loan is required to be made upon liens, change of ownership or a transfer.
For instance, a good rule of thumb that every investor should follow is to never have an LTV higher than 70%. The documents can be sent to the unavailable party ahead of time and pre-signed. With a loan servicing department, a borrower knows that such possibilities wont happen, and that no other agreement will be tolerated save for the initial one that was created when the loan was issued.

The funds for these short term loans that are provided by Coppercrest Funding, come from a variety of sources that include, but are not limited to, individual investors, hedge funds, pension plans, trusts, IRAs, and REITs.
Note Without Recourse V If this note is written above the signature it implies that future holders will not be guaranteed payments. They are experts in their field, and provide creative financing solutions because they know how to deal with, and understand complex transactions. These differences will be discussed later on in this chapter. Routine inspection reports of the construction site are prepared by an in-house inspector. With all of the knowledge you will obtain from Trust Deed Investing, you will gain the confidence you need to know how to protect your investment, choose the right broker and provide an excellent product with the least amount of risk. The third party separates the investor from interaction with the borrower, relieving them of burdens and hassles which helps the investor feel more secure in their investment because the loan process is likely to run smoother.