How to Prepare a Loan Application Packet for Mortgage Brokers, Private Lenders, or Lending Institutions
Image is immensely important in creating a good impression. When you go to ask someone to give you money to do a real estate investment project, you want to look as professional and impressive as possible.
People who make decisions to give you money, whether it is their money or not, like to have a lot of facts available to them. They don't want to have to go digging for this information, they want you to provide it to them. If you make it easy on them, it makes it easier for them to lend you money.
For that reason, it is good to put your money request in writing. Print it on good quality paper (rag bond is good, but plain white paper works, too). Make sure the pages are clearly printed, with no smudges or dirty spots. If you can't use a photocopier that gives a clean copy, print multiples of each page directly from your computer.
You will present a separate packet to each money person you approach. In the early stages of your investing career, you don't want to put all your eggs in one basket. You don't know for sure who will come through for you, so you should let 2, 3 or even 4 mortgage brokers take on the task of finding money for you. Then you can choose the best terms for you, and if one of them fails to come through for you, you have two or three others left.
Bind the pages of your packet together with a report binder, easily available at an office supply store. They have a plastic or paper cover, and hold the pages in place with a plastic spine clamp or else fold-over metal tabs.
Following are some of the items you can pug into your request packet:
Lenders want to know four major points about you:
a.Who you are
b.What you do
c.What you want the money for
d.How you intend to pay it back
The first page of your packet should explain this in clear and concise language. We have provided you with a sample of this letter (see box). You may use this as a model, but it is best if you put it in your own words. Just remember, relaxed, colloquial language is one thing, poor grammar is another. Use your word processor's spell-check and grammar-check features, then proof read carefully. The best spell checker can't distinguish among "there": and "their" or "they're", for example. Poor grammar and misspelled words do not make a good, professional impression.
2.Copy of the completed contract for purchase and sale
This gives verification of the deal, so that the money source knows that it is real and knows the price and terms. Since you will be preparing multiple presentations, use a photocopy of the contract here.
3. Comparable sales reports
The value of the collateral has a lot to do with the lending decision. In the case of hard money, it has everything to do with it. Let the money person know right up front how much this property is worth. You want to give the future market value, showing what the house will be worth when you collect your money from its sale, since this is the source of payment of the loan for a quick sale transaction. The future market value also justifies the amount you expect to spend on rehab. If the values are there, the money person may provide rehab funds.
This section should include the following:
a.Individual comparative sales reports (3-5 individual full page reports from the MLS)
b.Synopsis and analysis
The synopsis and analysis appears on a single page. You will show the cost per square foot of each comparable property, along with the average for all. You will add a line stating:
"All these properties are comparable equivalents to the subject property, and have an average cost per square of $_____. Therefore the cost per square foot for the subject property is assumed to be $______."
You can follow this with the figures showing this cost per square foot multiplied by the square footage of the subject house, resulting in the future market value.
4. Repair estimates
The repairs provide concrete justification of the difference between what you paid for the property and what you can sell it for. Don't skimp on information here. The money person needs assurance that you know what you are doing and are up to the task of getting it done. You might not know a pipe wrench from a ball-peen hammer, but you can prove you are on top of things by supplying the information. You will have your team do the work for you. This information will include:
a.Actual bid form copies
c.Labor estimates including time needed and hourly cost
5. Title search
Title work will show who owns the property and what kind of liens have been filed against it. The lender will always have this done for them before deciding on the loan, but it makes a good impression that you have thought to do so in advance.
You can do your own search at the county courthouse for no charge, other than the cost of photocopies (which are still likely to cost you a dollar apiece). You can ask an employee at the Registrar's or Recorder's Office to help you find the information you need. An alternative would be to have a title company do it for you. (This is for those states where title companies do the title work - otherwise the real estate attorney can do it for you). If you do the closing with the title company, they will provide this report at no charge. Otherwise, it will cost $250.
Good quality photographs make the property seem real to the lender. It's important to make them good quality, so that people can see what it's a picture of. The best time to take a picture is close to dawn and close to dusk. The lighting is better and you avoid the dark shadows that obliterate the view. The pictures should be somewhat flattering (don't make the house look like a shack ready to collapse). If your are looking to re-finance a property, before and after photographs are good.
7. Portfolio of past projects
The lender would like to know about any past investment projects you have engaged in. Before and after pictures and a description of the project are valuable. This would especially apply to any properties you currently own. Obviously, this is a situation where you can only do what you can do. We all have to start somewhere. If you have no previous projects, make no mention of the fact, and impress people with your preparation and your confidence.
8.Other personal information
If it will help you, include a financial statement, copies of two years of tax returns and a copy of your credit report. A financial statement for an individual consists primarily of a balance sheet, listing all your assets (what you own) and all your liabilities (what you owe); when you subtract liabilities from assets, you have your net worth. These will help you if they present positive and substantial information. They will not help you if your credit report shows 40 miles of bad road, or if you own no net worth, or if your income was $11,000 last year. You will still make your presentation, but the funding you get will likely be hard money, which is based on the value of the collateral, rather than on your income and credit worthiness.
When you are buying income property
Our philosophy is that you are best off capitalizing your business before you engage in income properties. Income properties require overhead, and you get overhead either from the business capital or out of your own pocket. However, if you are purchasing income property, you will want to supply information about the income you will likely enjoy from the property.
The income you should have about an income property would include the following:
•Rent Roll statement
•Profit projections for the coming two years based on cash flow analysis
•Gross Income Multiplier number, if applicable (for multi-unit properties)
Cover Letter (separate box)
With this letter we wish to request a loan in the amount of $32,500 with a term of not greater than one year for purchase of a single-family residence located at 321 Sycamore Avenue, Mudville, Kansas. Our business buys distressed properties, repairs and rehabilitates them, then sells them again to first-time home buyers.
The property in question has been in the possession of the present owner since 1996, in use as a rental property. The present owner is now retiring and will be relocating to South Florida in the near future. He wishes to divest himself of all local properties and therefore has negotiated a price very favorable to our enterprise. Our research indicates that this property will have a fair market value of between $52,000 and $58,000 after we have completed our repairs. This is estimate is based on comparable sales reports, copies of which are included with this packet. Our estimates also include repair costs of $6,000, including cost of modernizing the bathroom, new flooring throughout, painting the interior walls and replacing the roof shingles. With this work the house will be new looking and very attractive.
We have negotiated a purchase price of $25,900. The remainder of the funding we request from you will go for the costs of improvements and repair. A spreadsheet of the use of funds in included in this packet. We expect that the repairs and improvements will require 30 days work. Comparable houses in this area have been selling within 45 days, so we fully expect to pay the amount of this loan within 90 days of disbursement.
We would be happy to meet with you personally to answer any questions you may have and to further explain how we wish to proceed with this project.
Thank you for your consideration of this matter.