Preparing a property loan proposal to get your loan approved

A loan proposal is a document that outlines your financial situation and why you are requesting a loan. It should include information about your income, assets, and debts. You should also explain your credit history and any collateral you have to offer.

Whether you're a first-time home buyer or a seasoned investor, getting a loan to purchase real estate can be a daunting task. There are many different types of loans available, and choosing the right one can be difficult. However, by preparing a loan proposal, you can make the process easier and increase your chances of getting approved.

Components of loan proposal

There are several key components that should be included in your real estate loan proposal. These include:

• An overview of your financial situation. This should include information about your income, assets, and debts.
• An explanation of your credit history. This should include information about any late payments, bankruptcies, or foreclosures.
• A description of the property you are looking to purchase. This should include information about the price, location, and condition of the property.
• An explanation of your down payment. This should include information about how much money you have available for a down payment.
• A description of your loan request. Your loan request includes information about the amount of money you are requesting and the terms of the loan.
• Collateral. It includes information about any assets you have that can be used as collateral for the loan.

What happens in the initial proposal?

The first proposal you will make will almost always be a casual conversation with your supervising manager at a lending institution that issues development loans. 

The person you report to may have various expectations regarding your readiness, even when casually discussing a potential credit, depending on his personality and background. 

It is crucial to emphasize that you want to have a preliminary informal discussion about the potential credit because you want to determine his interest in the future transaction as quickly and effectively as possible. 

However you need to know the specifics such as identity and background of the borrower(s), the type of project, its square footage or number of units, and the hard and soft cost estimate.

Also, the time from loan inception to completion, the developer's expected profits, and the capital structure of the proposal, which can be the loan amount and loan-to-value (LTV) ratio.

The institution's administrative structure will determine the seniority level to start discussing prospects with. Some organizations hold weekly meetings where the staff of a real estate team discusses all new suggestions under the direction of the unit leader.

The meeting is open to questions and recommendations from everyone in attendance. The unit head then expresses his opinion regarding whether the lending officer should continue or move on to the following proposal. 

Tips to prepare real estate business loan proposal

Overselling

The memory and perception by others of how you marketed a loan proposal several months or years ago may or may not be a factor in your job loss, depending on the seriousness of the issue.

You should make an effort to be as impartial and expert as you can.

Contact the potential borrower

Your relationship with the potential borrower poses a constant risk during the approval procedure. Never tell a prospective borrower that his loan has been approved or will be approved before it has. You lack the authority to grant a final loan approval unless you hold a senior position. 

There is always a possibility that an oral approval will be withdrawn. Alternately, the loan could be authorised later, but the terms would be very different from what you had anticipated.

You risk suffering unpleasant consequences if you tell a prospect that his loan has been or will be accepted when it has been rejected or modified. You will at least take the brunt of his deserved disappointment and possibly lose his respect. 

He can make the incident personal and disparage you in the field. Even worse, he might tell your institution that you promised to help him. Worst of all, he can accuse you of making a loan commitment and file a lawsuit against you for damages.

Though the fraud statute applies to real estate, potential borrowers had prevailed in court when loan officers falsely claimed that the prospect's loan was authorised.

Be as neutral as you can while discussing the loan approval procedure and your progress with a potential borrower to prevent any of these scenarios.

The underwriting process

Even before you have all the essential information, you can wish to start drafting the loan proposal if there is a reasonable likelihood that the loan will be accepted.

You should have adequate information to draw out substantial chunks of the proposal if the borrower gave you a solid loan proposal. You can be assured that you will meet the borrower's deadline if you have completed most or all of it.

A preliminary draught can relieve you of a lot of future time pressure, stress, and suffering.

A moving target

It's a common underwriting challenge to hit a changing target. For instance, you might need to write a proposal before you can get an evaluation, an environmental report, or a report from a consulting engineer. 

You could need to revise your proposal if the finished property's worth is lower or higher than you expected; the engineer's report shows that the borrower's estimated hard cost budget is off by a significant amount, or the environmental assessment reveals serious issues. 

It is a typical risk of the underwriting procedure, and most adjustments are usually minimal. However, you will be forced to revise your proposal or abandon it if facts or events that you consider a material change.

Abandoning a possible deal, which is painful after you have worked hard on it, is typically the right course of action if you learn new information that is significantly harmful. If it turns out that you left something meaningful out of the article, you might need to hunt for another job.

Formatting the written proposal

Every lending institution typically uses a unique framework for loan proposals.

It may be tempting to exclude adverse facts or perform a less than complete credit analysis if a lending officer or senior reviewer has a positive predisposition toward making a loan. 

It is more difficult to skew the proposal through omissions because the lending institution imposed a predetermined framework to produce an all-inclusive loan proposal. Perhaps fewer preventable poor credit decisions result from this.

This is due, in part, to the fact that senior credit officers might have to assess a lot of proposals in a single day or that a loan committee might be presented with a lot of proposals at once.

Those involved must be aware of the location of pertinent information so they may quickly discover it.

The Front Page

A loan proposal typically begins with a cover page (often two or three pages in length) in practically all lending institutions, which provides a standardized description of the proposed transaction. 

The cover page is helpful for individuals who will evaluate and authorize the loan and those who will record and manage it after closing.

Numerous important details, loan conditions, pricing, risk ratings, institutional codes, and descriptions are provided, many of which match fields in the lender's management information system. Additionally, it is a quick approach for anyone to understand the transaction well.

Memorandum of Credit

The executive summary comes typically first in the credit memorandum, which comes after the cover page. The amount and purpose of the loan—what the money will be used for—are typical elements of an executive summary. 

It includes a description of the transaction (for example, a first mortgage secured by property XYZ) and a brief project/transaction analysis (typically basic LTV and debt service coverage ratios). 

It also includes the rate, fee, term, and other details of the proposed transactions; the expected profitability; the names of the borrowers/guarantors, including their qualifications and histories; and a risk assessment. 

The credit memorandum's content follows the executive summary. Its length may be a few pages, like four or five, or there may be no set length restriction, depending on the culture and regulations of your institution.

Its objective proposal of all pertinent information, facts, analyses, evaluations, conclusions, and suggestions will allow the reader to establish his judgments.

You may think of the credit memoranda as a term paper. A strong proposal ought to be thorough and concise. It usually takes the shape of a story and contains the typical portions the lending institution has set forth.

The proposed terms and conditions of the loan facility, a discussion of the existing property and suggested improvements, as well as its feasibility and market, the developer's and his team's financial and professional standing, are included in the credit memorandum. 

It also includes depth, relationships, environmental concerns, jurisdictional regulations or restrictions that must be addressed or met, the deal structure, the proposed loan's terms, and a project budget. 

A description of the borrower's marketing plan, a discussion of current and upcoming leases from identified tenants, a summary/conclusion section, and exhibits including photos, site plans, documents, and comprehensive budgets.

The evaluation of the property may or may not include an appraisal report.

Repetition in proposal

Some loan officers make a lot of effort to be creative in their written proposals to stand out and set themselves apart from the competition. 

Even while they could feel some satisfaction from it, if their goal is to grow within the company, this is generally not the wisest course of action.

In lending, productivity almost usually triumphs over innovation. If you are in charge of finding new clients, devoting too much time to drafting very complex or creative reports can prevent you from doing your main job, which is calling on potential clients. 

If your job function is focused on credit analysis, the more deals you can quickly and thoroughly assess, the more productivity goals you'll hit and the more time you'll have to do other things.

Copying or plagiarizing written material is frowned upon and, at worst, prohibited in many professions and industries. In contrast, it is a helpful and accepted tool in the lending sector.

When feasible, you should rely on other people's work. You can save a lot of time by doing this. Additionally, reading materials written by coworkers and others can teach a lot.

What can you copy?

You can save time by copying sections from evaluation reports. In actuality, the appraiser most often duplicated the data from a source used by the entire industry or from another analyst in the appraiser's office. 

You must take care to use only pertinent information. Using too much material could be detrimental to your cause. The reader may get the idea that your proposal is overly scattershot, poorly thought out, or that material was added purely to impress the reader with volume rather than quality.

Other parts of the home loan proposal may be lifted verbatim from the prospective borrower, his advisor, or the broker filing it.

On an Excel spreadsheet or using a tool tailored specifically for real estate, they frequently produce outstanding income statements, cash flows, sources and uses statements, and financial projections.

Try to obtain their work immediately from a disc or via email. Then you may use the information and alter it to suit your proposal and analysis rather than spending time developing new spreadsheets and entering data.

The performance of relationships

When a borrower promises that a lender would grant his loan requests based merely on a word-of-mouth application because of his close personal relationship with the lender, many knowledgeable real estate lenders listen with curiosity and a dash of scepticism.

Their claims occasionally have validity due to a lack of appropriate institutional controls or intentionally relaxing those rules for "choice" wealthy consumers. 

This is regrettable, especially in the construction industry, where successful borrower performance is crucial, and risks are higher than in most other lending-related industries.

The term "connection" is used broadly and typically contributes relatively little to the lending analysis and the possibility of a loan being approved.

A relationship similar to a strong resume may help a potential borrower gain a loan approval or a better offer when the borrower poses an above-average credit risk.

A borrower's relationship with your financial institution should not be a significant consideration when designing the lending facility and, of course, when determining whether to extend a loan.

Pressure during proposal

Due to the deregulation of the savings and loan sector and the relatively high-interest rates on deposits set by supply and demand market forces, lenders were under enormous pressure to issue bigger, riskier loans to meet deposit costs and expenses.

As a result, there was a decline in credit analysis and practises that persisted from the first evaluation of the application to the final approval and loan disbursement. 

Unfortunately, some lending institutions will always present a chance to engage in unethical behaviour, particularly those with secondary objectives that are at odds with making money and minimising risks and losses. 

This can also be ubiquitous in organisations where the need to attract top borrowers, increase market share, and the influence of senior management's relationships are all influential factors.

When these circumstances are present, you could feel a lot of pressure to make a loan based on information containing critical omissions or even mistakes. 

Senior management frequently offers several purportedly persuasive explanations for issuing the loan due to its motivations.

You will be responsible for creating a proposal with enough filler to seem decent enough to get approval.

You have no choice except to advocate for the lending facility in these circumstances.

Loan Records

Always keep two files on hand. The first is a working file, an unofficial file that you can use to store papers, correspondence, notes, and memos for easy access. The other loan file is the "official" one, which other bank employees and external auditors will view.

The Official file

You build up a loan file as you progress through the approval process. It will include an appraisal report, an environmental assessment, images, maps, budgets, credit reports, background checks, and correspondence with the prospect.

You should keep the file's content professional and objective as you construct it. You should not include personal memoranda and notes in your credit report unless they are essential to your credit analysis or are accurate descriptions of actual transactions. 

It is crucial because the file could be used against you if the borrower disagrees with you or your institution or brings complaints against you or your organisation (such as accusations of discrimination, defamatory statements, or meddling in the borrower's operational business).

Once this information is in a file, it could be challenging to remove it, and elements that shouldn't be there might reflect negatively on your professionalism during assessments by internal or external auditors or senior management.

The Unauthorized File

One of your best defenses against being coerced into making a loan you don't think is a good one is to closely monitor the loan and produce and submit written reports about its progress.

You should include a concise synopsis of the extra issues discussed during the approval process and how they were resolved in your initial file document.

If you can, include the summary in the official loan file. You should write it professionally and neutrally.

If there are issues with the loan, the file is well documented. If your institution's policy prevents you from inserting summaries or filing memorandums, you should write them and save them in an unofficial file.

If the proceeds as expected, your diligence has not cost you anything. You have another source of review if there are issues.

If the subject of blame arises, you can better defend yourself by examining the memos and notes in your unofficial file to sharpen and hone your memories.