Before you can obtain a substantial private loan, it is standard procedure for your loan request to go through the underwriting process. As the Federal Deposit Insurance Corporation (FDIC) explains, “Underwriting is the process by which the lender decides whether an applicant is creditworthy and should receive a loan.”
Lenders do a lot of technical analysis during the loan underwriting process; however, the process is pretty simple for borrowers. You simply need to collect and provide the requested documentation to the lender and then wait to receive the lender’s decision.
The specific documents you’re asked to produce and the time the underwriting process will take is going to vary depending on the type of loan you’re seeking. The more you want to borrow and the longer the loan term, the more comprehensive the underwriting process will be.
If you are a private lender, then you know that the underwriting process for a private loan is quite a bit different from the process of a conventional bank loan. Banks have certain requirements that must be met, especially good credit. A low credit score will usually end up in instant rejection by a bank, whereas private lenders consider the bigger picture and look at the track record of a prospective borrower. In this way, inadequacies in one area can be compensated for in another, without resulting in immediate rejection.
Today on the Rules of Thumb blog from MoneyThumb, we would like to share the 4 Cs of the private loan underwriting process. By following the advice listed in each one, you will have a much better chance of getting that private loan you are seeking. We have listed the 4 Cs below:
The Four Cs of The Private Loan Underwriting Process
- Collateral. This is one of the most important factors, especially for a private lender who's underwriting practice is asset-based. For a better chance of obtaining a private loan, you should explain why you believe your assets are a good investment.
- Character. A private lender isn’t just giving you the funds you need for your project, they’re entering into a business partnership with you. This is also why it’s important that you’re available to your lender during the underwriting process. If your lender calls or emails you with a question or to request additional documentation, make sure to respond promptly because if a lender can’t get an answer from you during the underwriting process, why should they believe they’ll hear from you when the time comes to repay the loan?
- Capacity. This is your ability to repay the loan. Unlike banks which often have to consider a borrower’s global debt picture and their debt service coverage ratio, private lenders are focused on your assets and ability to repay the loan.
- Credit. Even though private lenders don’t have the same credit score requirements as banks do doesn’t mean that they won’t want to know about your credit history. What it does mean is that if you have had any credit difficulties in the past, a private lender will want to know the story behind such difficulties and won’t immediately toss your application in the reject pile.
- Communication. Establishing open communication with your lender will help you get your loan approved and closed faster and will help ensure that you have the funds you need when you need them. It’s also important to keep your lender in the loop after you’ve received the funds. If something unexpected happens, an informed lender is much more likely to work with you through any additional hurdles that arise.
By keeping the above 5 Cs of the underwriting process in mind as a borrower, you have a much better chance of obtaining a private loan.
If you are a private lender just getting started in the niche, these tips will help you become successful, as well as using MoneyThumb's best-selling product, PDF Insights, to help you make quicker and better-informed lending decisions. Follow this link to request a free live demo of PDF Insights.
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