If you’re a first-time real estate investor or new to borrowing money from a lender, you might be wondering what an underwriter is and how they play a critical role in getting your loan funded. At Asset Based Lending, our underwriters and credit committee want your project to succeed. That means in order to fund a good loan our underwriters need to evaluate and assess the borrower’s credentials, project details, and build trust.
The purpose of the underwriting call is to get the risk management team comfortable with the loan and with the borrower. The underwriters want to be confident that the borrowers will be able to complete the work, sell the property, and repay once the loan reaches maturity.
An underwriting call is an essential step in the loan approval process. It provides an opportunity to assess risks associated with the loan and helps identify potential red flags before moving forward. In this blog we’ll walk you through the typical agenda of an underwriting call and why it’s important for both parties.
Understanding what to expect when speaking with the underwriter will help the process move quickly and build trust between the lender and borrower. Here at ABL, the borrowers speak directly with the decision makers. Through a real conversation there’s streamlined communication and a clear layout of the deal information.
What’s the Purpose of the Underwriting Call?
The purpose of an underwriting call is to highlight the specific details of an investor’s plan and perform an honest assessment of their financial capacity. The underwriter wants to ensure factors like credit score, liquidity, and experience align with the project you want to complete.
Without financial security and credible experience, the underwriters won’t be confident that they are funding a good loan. That’s why it’s important to be transparent about your experience, the amount of cash you have in the bank, and your credit score.
The underwriter also wants to ensure the loan amount matches the plan for the property renovation or construction. For example, if you’re planning a cosmetic renovation for an 1,800 square foot property and you have a renovation budget of $50,000 – that would line up with the cosmetic renovations required to complete the project.
Similarly, if you wanted to do a gut renovation of an 1,800 square foot property and your budget was only $50,000, there would be healthy skepticism from the underwriter, who would dig deeper into the project and ask questions to determine where you came up with that budget.
On the call, the underwriter wants to hear you go in depth on the scope of work, materials used, and the level of finishes being put into the home. The ability to speak eloquently on your project plan will help get your loan approved faster and establish trust with the underwriter.
Why is the Underwriting Call Important for the Borrower?
The underwriting call is significant for the borrower during the loan approval process, as they have the chance to establish their credibility while asking any questions they may have. The underwriter wants to make the loan terms as transparent as possible to not have any confusion moving forward.
Achieving this will make your loan process run smoothly. By the end of the call, the borrower should have a clear understanding of what information they need to provide to further the deal.
If the underwriter identifies any potential issues that could lead to the project being delayed or foreclosed, there can be mitigation between the borrower and the underwriter to avoid negative factors towards the loan approval.
This step is vital for the borrower as it offers an opportunity to present a personalized and comprehensive view of their financial profile and investment plans.
By maintaining open communication with the underwriter, you can address any concerns and discuss terms. Showcasing your commitment to the investment project will increase the likelihood of a successful loan.
Why is Underwriting Important for a Hard Money Lender?
At Asset Based Lending, underwriting directly impacts the company’s risk profile, profitability, and overall success of our lending operations. Underwriting allows us to evaluate the property’s market value, condition, and potential resale value.
Hard money lenders require thorough underwriting that will ensure the proposed loan is viable and that the borrower’s ability to repay is properly evaluated.
By understanding the ins and outs of the project, exit strategy, and sale comps in the area, the lender can determine if the borrower’s business plan or investment strategy is feasible.
Hard money loans often come with higher interest rates and shorter terms due to their higher risk nature. Effective underwriting helps the lender minimize the risk of default by ensuring that the borrower can meet their financial obligations, and the property’s value provides sufficient collateral to cover potential losses in case of default or foreclosure.
At Asset Based Lending, we understand that good underwriting ensures both borrower and lender success, that’s why we’re here every step of the way.
What Happens After an Underwriting Call?
After talking to one of our underwriters at Asset Based Lending, if they are comfortable with the loan and want to move forward, the underwriter will submit it to the credit committee for further evaluation and final approval.
This process takes a swift 1-2 hours on average once it’s submitted. From then, a term sheet and appraisal order will be sent out. The term sheet serves as a conditional approval for your project.
This means that terms should only change if there are material changes from what the borrower initially told us. Something like property value or credit score can affect the initial terms of your conditional loan approval.
At ABL, efficiency is a priority, and our goal is to get the term sheet out to the borrower within 24 hours of the underwriting call. We understand the importance of promptly moving the loan process along to meet your needs and ensure a smooth transaction.
The efficiency of the process following the underwriting call depends on several factors. These factors include the completeness and accuracy of the information submitted by the borrower during the application process, the complexity of the deal and property, and the borrower’s responsiveness in providing any additional documentation or answering follow-up questions.
Asset Based Lending strives to work closely with borrowers to ensure a seamless and expedited loan approval process. We encourage proactive communication and cooperation from you to help us efficiently move the loan towards closing.
Overall,
The underwriting process is designed to help lenders make informed decisions based on the borrower’s capacity and the property’s potential, minimizing the risk of default, and protecting both parties involved in the loan transaction.
The underwriting call is crucial for loan approval in real estate investments. For borrowers, it’s a chance to exhibit their viability and investment strategy, influencing lenders like ABL positively. It’s a bridge of understanding between both parties, leading to successful loan arrangements.