The various phases of a loan, from application to approval

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Okay, welcome back. Today's lesson is going to be one of the longer ones. And we're going to talk about the various loan phases, the phases that alone goes through, I'm going to be walking you through each of those that your typical lender we're used, and then also talking about some things that you need to consider along the way. So the various phases worked like this, they can move a little bit here or there. But in general, you're looking at having an application phase first, where you're going to be filling out either an online or a paper application of some sort, and submitting that with other loan documentation to the lender. Then the lender takes that application goes off on their own and does what's called underwriter basically, sort of spread or calculate various things.

They take a look at all your information and calculate some ratios. They think about their loan appetite, and they basically, just overall take a look at the loan application and just start to determine where they feel like they fall. So they underwrite the loan. Then you get to the decision phase and of course, what We would prefer for you to get approved, but sometimes you can get declined. Other times in the decision phase, you may get what's called a counteroffer, maybe the lender is not willing to give you the full amount you asked for. But maybe they're willing to give you a reduced amount, or give you the full amount missing collateral or other things.

Hopefully, if you get approved, you move all the way into the closing phase where they're going to actually produce the documentation that you have to sign. Sometimes in today's world with technology, you can just do that online. But other times you have to do a closing in person. Oftentimes, this is with real estate based loans where you're closing at a title company, and then post closing which really doesn't involve you as a borrower a whole lot, but is the phase is one of the phases that the lender themselves goes through. So the those phases typically fall in that order. But things like this can happen, meaning you can move through the application phase, gather all your documentation that they requested from you submit your application, and the lender will get to the underwriting phase and before moving on to the decision.

Phase, they may come back to you as the bar or requesting additional information. Maybe there's something they saw that concern them. And they needed clarification. Maybe there's something negative on your credit, and they can't fully understand exactly what that is. So they're asking you to clarify what's going on that they saw. Maybe they saw something in your business plan that they don't feel like you fleshed out enough that they want to understand maybe you didn't talk enough about marketing, and they want to know what you plan to do.

There's all kinds of things that can happen, where the lender moves away from the underwriting phase sort of pauses that and then sends you back to the application phase. Another thing that can happen here as you can be missing pieces of documentation, one thing I would caution you on is when they give you a list of documents to prepare for them, make sure you provide all of it at the same time. Don't do what's called piecemeal this input information to them by sending one piece at a time, gather everything that they've asked for, completed, filled out and signed, and send all of it at the exact same time to the lender, and then I would even ask them Please verify for me you have everything you need to move to the underwriting phase. So you just need to understand that along the way after the underwriting phase, or as part of the underwriting phase, they may pause things and come back to you and the application phase will kind of restart.

Once you've gathered the remaining information they've asked for you, you'll move back into the underwriting phase, and they'll pick things up. This can happen multiple times, unfortunately, now if that's the case, what I would encourage you to do is to push the lender a little bit, especially if they've come back to you multiple times and just say politely, hey, listen, this is about the second time you've come back to me for information, I understand that you want to know enough and I'm really looking forward to your decision. But I'd like you to give me a list of everything you need this time so that we don't have to do this ping pong game of back and forth. The way you handle that is going to be important, but I think it's okay to challenge them a little bit on this. Hopefully then they've got everything they need, and they're going to move to the decision phase.

Now in the old days of banking and lenders, we used to have committees, groups of people that would sit around a meeting Maybe once a week, once every other week, once a month and then decide as a group, but they were going to do about them alone. In today's modern living world, most of the time, either the actual software system is making the decision, or the loan officer or the underwriter is making that decision based on authority that they've been given by the lender. So you get to the decision phase, and again, we're hoping that you get approved. And then after that you move toward the closing phase. And this is where they're going to be taking a look at getting your papers, your documents prepared and sign and then the post closing phase. And actually, even though I only showed it to you here, just know that this can happen as well.

You could get all the way to the post closing phase and end up back or I'm sorry that you could get to the closing phase, and end up back anywhere in this process to the application part to the underwriting part and even the decision part. A great example of when you'll get close to you'll get into the closing phase and have to move backwards is with real estate With real estate, they've usually approved the loan pending an appraisal. So you've already had a decision, you move into the closing phase and somehow the appropriate appraisal is ordered and comes back for less than is necessary to get the loan. At that point, the lender will go all the way back to maybe the application phase and ask you for more information or more collateral, or they'll go to the underwriting phase and decide if they're going to counter the offer they've given you.

Maybe they reduced the loan amount based on the new value of the property. So just know that the process tends to flow in a given order, but it can fluctuate and frankly, it can move around and then back into previous phases depending on what occurs. A little more information about the application phase. Oftentimes, this begins with a commercial loan officer. But in today's world, we are seeing more use of digital applications where you fill information online. Oftentimes still you'll get information from a lender where they want to speak with you and ask additional additional questions.

Again, today's modern world technology is changing this and we are seeing more digital applications. For example, there's a company called upstart who 25% of their loans is already currently being entirely done by computer, meaning a human doesn't touch it at all. Pretty impressive things. And I think we're going to move more in that direction with lending. Matter of fact, I'm seeing it with AI and machine learning. But know that it typically starts with a person or a digital application, and then a person gets involved.

The timeframe for an application phase can really depend a lot of the times it depends on us, the bar member what I was saying earlier about not providing all the information that the lender has asked for, when you're causing them to have to start and stop the process over and over, you're really slowing down the process of getting closer to a decision, make sure you're doing all that at the same time. So the timeframe here really depends on you. It also depends on how much loan volume they have, right? If they have a whole lot of loan volume, a lot of applications coming in and they only have so many underwriters, it's gonna take them a little bit long to get to it. Now, there's certain types of documentation that you're going to need at the application phase again, this course would be really good difficult for me to cover absolutely everything you need.

But I can talk about the most common documents that you're going to need. And these are typically for all owners, you can see this here just below the title, all owners with more than 20% ownership. So normally you're going to have an application again, digital or paper, make sure you sign it and dated. Oftentimes, that application includes language that attorneys have prepared to that you are showing you're agreeing that the lender can order your credit and other terms of their application process. So make sure you've signed it. Then a personal financial statement.

This is typically or one or two page document where you list all your assets and liabilities and he lists things like cash, cars, homes, and on the flip side of that your listing what you owe on any of those things. And it just has your assets and liabilities which we'll talk more further about what this means. But make sure you've signed this as well. And data that I've seen in the past for a lot of people want to provide a common personal financial statement that then you But oftentimes a lender will ask you to go ahead and use theirs and sign it again. That's just because there's typically some legal language on there that they need you to acknowledge. They're not too hard to fill out.

One of the things I would encourage you to do with a personal financial statement is understand that you don't have to have all that information down to the penny. Just get it as close as you can get it. If the lenders concerned about the amount that you've entered, they'll ask you to provide some background information or maybe some bank statements to verify what you put after personal financial statement, you can be almost assured that you're going to be required to give some personal and business tax returns. Now, this can vary a little bit depending on the loan amount. If you're asking for a $10,000 loan, they may just approve you on other documentation and your credit score. But for most business loans, they're looking to two to three years of personal and business tax returns.

And the reason they're doing that if you remember in an earlier lesson, I talked about that idea of how lenders are historical looking, the only way for them to know historically how your business has performed is to take a look at those tax returns the information you've submitted to the IRS to show what type of earnings that you've had along the way. So be prepared to do that. Again, remember, this is for all owners. So if there's two, you and two other partners, all three of you're gonna have to provide your personal tax returns, then you provide your business tax returns. And this is also for any other businesses that you were the other founders may have 20% or more. And the other thing I want you to note about these is your tax returns have to be signed.

And also you want to give them the full schedule, don't just give them the first two pages of the tax return. And the reason is, actually is there's information on the following pages that the lender can use when they're calculating your debt service coverage ratio, to come up with a better number in your favor. So provide them the referral schedules. They're also going to ask for a year today, balance sheet and profit and loss statement. Here's the good news about these. If you're using any type of bookkeeping, maybe QuickBooks Online like I do, or some other services, e ro or any of those, you can produce these pretty easy, as long as you've been keeping up with it.

If not, go to your accountant or your bookkeeper and ask them to prepare your data. balance sheet and profit and loss statement. What are you doing here today is if it's September and the year isn't over, you still are going to have to provide that profit loss statement and balance sheet maybe as of the end of August, right. So just be prepared to provide those. The reason is, is your tax returns show what you've done in previous years. But this information shows how you're doing right now for the given year.

You're also going to be asked for about a business debt schedule, which is just listing any debts that the business has, right, those should show up on the balance sheet, or what they're looking for here is what are the exact balances and what are the payments that you have on this information. Now, there's other documents that you may have to provide depending on the type of loan you're getting. For example, you may have to provide a purchase agreement. This is usually on a fixed asset. So if you're buying a piece of equipment, if you're buying some real estate, if you're buying a car, a truck, any of those type things, you should have what's called a purchase agreement from the vendor showing exactly what you're paying for that piece of equipment or that real estate And the reason is this is used to calculate the loan amount.

We're going to be talking about loan devalues later on in the course. And they use your purchase agreement the amount that you're buying this for, to calculate the amount they're willing to loan against that. It also proves to them that you're buying it and provide some other information like Vin numbers, all kinds of things about the asset that you're buying. Another loan document you may have to provide is an AR schedule. Remember AR s or I'm sorry, aging report. Remember, ar stands for accounts receivable.

Just know that you may have to provide this if you're looking for a line of credit where your accounts receivable will go against your as collateral that loan. And one of the things they're going to do here with this documentation is they're going to discount it for anything over 90 days. What that means is, let's say that you have a couple of customers who haven't paid you in 120 days. First of all, you need to be calling them to collect from them. But secondly, the lender may take that balance away from the full amount of your accounts receivable to determine how much they're willing to give. As a loan against your AR, so an aging report is going to be important to provide to the lender.

And this also can oftentimes come out of your QuickBooks or other accounting software. for construction loans, you may be asked to provide surveys and renderings, any architectural information. And this is just so they can start to work on what the value is going to be of that real estate, what's called as complete so when you're building something, there's no real way to tell exactly what the value of that property or that real estate's going to be when it's finished. They can use comps and things like that, like they do and other real estate deals. But with construction deals, they ask for surveys and renderings, so they can start to build a picture of what this is going to look like when finished and what they think it might be worth. Now, so we've gone through the application phase, we've provided all types of information and documentation.

We gave the lender everything they've asked for, we've signed everything, it's complete as the best of our ability. We've turned it in and they go to the underwriting phase. What they're doing here most of the time is doing what's called spreading your financials. This calculating your debt service and other ratios. Again, we're going to do those later in the course. We'll actually be practicing them with some live examples.

Be prepared to answer other questions or provide other documentation. Again, avoid the ping pong effect and make sure you're answering all the questions that they have at the same time. The underwriting fees depends on the complexity of the deal. If it's a $10,000 loan, they're not going to spend a whole lot of time underwriting it because they'd be losing money with the amount of manpower they're putting behind the loan. However, if it's a huge real estate deal, it could take a lot longer. You also need to know the unsecured loans can happen as fast as a few days because there's no collateral considerations or a secured loan.

Just the underwriting phase itself can take two to four weeks. Also, just as a reminder, the lenders volume can impact how long it takes. Alright, so we've been through underwriting we're going to move into the decision phase. And this is usually requires someone at the lender who has the appropriate authority Again, I mentioned earlier that you can have a committee but it's not that common these days, there's actually one individual or sometimes even a machine that makes the decision. But then the decision phase, the underwriters are going to provide this information to the person with the right authority, and they're going to make your loan decision. You can remember end up in this phase and go back to the underwriting or application based.

If the person with the authority has other questions. They also may give you what's called a conditional approval, which means that the person with the authority likes the loan, but they want to condition your approval on something maybe they approve the loan, but it's conditioned upon the appraisal coming back for a certain amount. When they approve you, they're going to give you something called a term sheet or commitment letter give. We're going to talk about those in another another lesson and then the timeframe for decision should be pretty fast. As long as this person has all everything they need to make a decision. It should only take a few days.

In the closing phase, the lender is going to work due on what's called clearing any conditions, so maybe that conditional approval for the appraisal is still hanging out there, they're going to get that out of the way. Title work. Also, if it's been too long since they approved your loan, they're going to read over your credit to make sure you haven't run out and borrowed a bunch of money. Right? Don't do that. Don't go out and borrow more money in the middle of an application for a business loan.

It's just a bad idea. So if you're going to buy a house, either do it ahead of time or wait till afterwards. Also remember, reaching the space doesn't mean you're in the clear, okay, there's a couple things that can happen. And again, we're going to talk about term sheets and commitment letters. The timeframe for the closing phase can take a few days for unsecured loans or a while with real estate loans. It's going to take a while because of that appraisal.

That's usually the piece that takes the longest. Excuse me. And remember, in the closing phase, the loan is typically closed by employer of the lender or with real estate when you have a title company involved or return. Alright, so now you post your loan and the lender has it, they have to do what's called put it on their books. This is when they're going to do what's called service your loan. They booked it in there, they listed what payment you're supposed to be making and then they're ready to accept those payments and track your loan.

They'll also monitor the loan for performance to make sure you're not light. Keep in mind auto payments may not work the very first month if you set those up to get a discount with the lender know that the very first month that may not happen in and of its own accord, and know that annually, you're most likely going to have to provide updated financial statements as part of the covenants of the loan.

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