Whether you’re applying for a hard money loan, a home loan, or an auto loan, your application will be required to go through an underwriting process.
Not knowing what goes on in an underwriting process can actually ruin your chances of landing a hard money loan and throw your application in the rejected pile.
Here’s all that you need to know about the underwriting process, how it works, and how borrowers and applicants can swerve through the process effortlessly!
What is Underwriting?
Extending hard money loans can be a high-risk process for both borrowers and private money lenders. To ensure that the borrower won’t default on their payment and be able to pay high-interest rates throughout the repayment period, private money lenders hire underwriters to gauge the borrower’s creditworthiness.
Underwriters can either work manually or use an automated system to help them skim through the hundreds of loan applications and ensure that they’re approving the right applications.
With a streamlined underwriting process, private money lenders or banks know that they’re lowering their risks and working with borrowers who have a decent loan repayment history.
Underwriting: How does it work?
As you might have guessed from the looks of it, underwriting can be a tedious process. The underwriters need to evaluate each aspect of the applicant’s personal and financial information.
Underwriters might need to review financial statements, transactions, credit histories, credit scores, and even repayment histories. This ensures that the applicant is worthy of receiving the hard money loan and will carry out periodic repayments according to the loan terms.
Moreover, underwriters are required to go through an applicant’s income, assets, and financial liabilities to make the final decision.
Here’s all that underwriters need to evaluate before giving a nod of approval to the applicant.
Credit Scores Are Crucial
A good credit score can get you a stamp of approval within just a few hours!
When it comes to reviewing loan applications, underwriters take great care in evaluating credit scores. A poor score indicates that borrowers have been reckless in amassing loans and not repaying them on time.
On the other hand, a good credit score, preferably 730 or higher, assures the underwriter that your credits and loans are well managed and you’ve got a good relationship with lenders and credit unions.
Moreover, underwriters might also review the applicant’s credit reports. This is to ensure that there are no foreclosures or bankruptcies to the applicant’s name. These negative remarks indicate the borrower’s failure to repay the loan amount on time, which might get the applicant rejected.
Repayment History Matters
As you can tell, most underwriters are interested in a borrower’s previous financial history.
From their credit reports to their repayment history, underwriters are tasked to dig deep and find any inaccuracies in the borrower’s application. These underwriters take a keen interest in inquiring about the applicant’s debts and liabilities.
Their primary concern is to ensure that the applicants don’t have any outstanding debts or any other liabilities. This helps them evaluate the applicant’s current financial standing and if their finances and liabilities align with the lender’s policies.
The Source of Income
When it comes to approving an application, the underwriter ensures that the applicant has a steady source of income.
Since most lenders have a specified salary limit for borrowers, underwriters need to ensure that the applicants fall within this limit to get approval. Similar to credit scores and repayment histories, this ensures that the borrower uses their income to make periodic repayments.
Since most hard money loans and bridge loans are asset-backed, they require valuable collateral to be approved.
The underwriter will review the collateral, its value, and its anticipated value at the end of the loan period. It’s important to note that the collateral should have a higher value than the loan amount. This ensures that the collateral would be enough to recover the loan amount if a borrower defaults on the loan payment.
Underwriting: How long does it take?
Borrower applications are forwarded to underwriters within just a few hours. While these applications can take anywhere between a few hours or days to be reviewed, a complicated and flawed application might take a month to be evaluated and then approved.
How to Navigate Through the Underwriting Process?
An underwriter can reject a loan application. To avoid landing up in the rejected lot, here’s how borrowers can prepare for the underwriting process.
Address the Concerns
If you think that a loan or repayment might stop you from securing a new loan, address it.
Resolving loan repayments, improving credit scores, or paying a large down payment can actually brighten your chances of landing a hard money loan.
Take your Time to Fill out the Documents
We have said this before, and we’ll say it again: underwriting is a tedious process.
To make matters quick and easy for yourself and the underwriter, ensure that you’re filling out each document and adding all the required details. Moreover, ensure that you’re attaching financial statements and credit reports that the underwriter needs to review.
Avoid Fudging the Numbers
You might think that faking your financial records will help you sail through the underwriting process. Think again!
This manipulation can get your application rejected. Moreover, it can actually land you in legal trouble. Borrowers must always be transparent during the loan application process to avoid legal complications or denial from the underwriter’s end.
Find Hard Money Loans Underwritten 100% by Private Funds
At Commercial Private Equity, our application process is 100% underwritten by private funds. This helps expedite the loan approval process and ensures that our clients can access their loan funds within the given time frame.
Having been in the real estate industry for the last 75 years, Commercial Private Equity has mastered the art of underwriting hard money loans, commercial bridge loans, and construction loans. Our low-interest rates and our low LTV rations make us a client favorite and help lower the risks for both the customer and our firm.