Understanding the Process and the Underwriter Module 4
The Fix and Flip market has grown exponentially with TV shows showing you how easy it is, seminars with the stars of these home improvement shows commanding big dollars to teach you the hidden secrets of what it takes to be successful, builders trying to supplement their business, and finally every dreamer that wants to make it big in real estate trying to make their mark in the industry. Just knowing that it is not as easy as it looks on HGTV is your first step and then understanding that there is no hidden secret, it is just common sense. Knowing your area, getting to know your comps, costs, and what improvements sell homes.
The most important thing is obtaining the money you need to complete the transaction. Financing is not something that you can try to do without proper preparation. You have to think about what you’re doing as a business because it is a business. Financing will be the core of your business, without it, there is no business unless of course, you have 2-300k laying around to get started, and even then it is smarter to use other people’s money.
In this final segment of the Fix and Flip articles, we will finish up with the underwriting of the file and being able to understand the process.
Mortgage underwriters are the final step in the approval process. As we look at the procession of the file, the loan representative is the front line, the person responsible for putting the deal together. Experience here counts! The loan representative must be able to structure the deal so that it flows smoothly through the process. Collection of documents, reviewing documents, foreseeing any issues, and knowing what additional documents are needed, then putting the file together in an acceptable manner so that the processor and underwriter can easily understand what the borrower is trying to accomplish. This is the most important segment of the loan process. I can tell you that I have received files that have been sent to various lenders and have been declined, and through proper structuring and providing supplemental information was able to get it approved and funded.
Once the file is ready to submit it is handed over to the processor. The processor will then add the file to the lenders’ loan system and begin to verify information. They will update the credit report, verify the status of the business, verify employment, request updates on the title, and order appraisal or BPO. They will also put together a needs list for the borrower if anything is missing. Complete the needs list quickly and in its entirety, do not piecemeal documents, this only causes confusion, and mistakes. The missing items list should be small if the loan representative properly did their job, and it should include information on the Insurance type and the Mortgagee Clause that is needed. Once the appraisal or BPO comes back the file is updated and submitted to underwriting.
You need to understand who the underwriter is and what they do. The Underwriter is more than just a person who holds your real estate investment or even your homeownership in the cup of their hands. They are the guardian of the realm, they are there to protect the livelihood of everyone in the lending facility, and to guard the financial well being of not only the company but also the investors, hedge fund, or even the retirement or Insurance fund they use to fund the deals. And finally, the underwriter is protecting their livelihood and reputation.
The underwriter is going to underwrite the file for the benefit of the company, not for the benefit of the borrower. But they are very aware that the lender is there to close as many deals as possible.
The other thing you need to know is that underwriters look at hundreds of files, and human nature tends to make us work on the easy tasks first. Files that need work or are receiving piecemeal information can be pushed aside while other files move through the process. Those tough files that are not structured properly will cause the underwriter to see red flags making them dig deeper to find other items that may result in a denial.
The underwriter does a deep dive into your credit report, financial and bank statements, and reviews the property (asset) to assure that everything meets their company guidelines. When you are the borrower, there are 2 golden rules. The first is that you don’t try to hide anything. We are a technological world and with the resources available and used by lenders they will find out, whatever it is. The problem is that it is usually discovered towards the end of the process, causing a possible denial late in the process. If you are working with a knowledgeable rep they should be able to instruct in the proper handling of whatever the situation is. Secondly, never do anything without consulting with your loan rep first. That includes making any large purchases, moving money around, or quitting your job to make millions in real estate.
Understanding the process and what the underwriter’s position is, should help you when trying to obtain financing. As I mentioned earlier, preparation is an important aspect of growing your business and obtaining the money you need to keep growing. Personal credit is key for a new business because all financing will be based on that until you can grow your business credit and you can separate your personal finances and credit from the business entity. Taking the extra time to prepare and ready yourself will provide the easy access you need to cash flow and save you thousands in interest and thus impacting your profitability.
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