It’s true that there are some issues that simply crop up during the course of a loan transaction, and it is often difficult to predict or prevent them. Yet, right at the start, there are often clear red flags of issues that will kill a deal—or significantly change the direction you need to take. If you can recognize these red flags for what they are, you can nip those problems in the bud and save a great deal of time. Here are some common ones:
Find out what your borrower’s credit score is! I know many of you are not set up to pull credit, and many lenders pull credit in final underwriting only and use broker-pulled credit at loan submission, or go off the estimate provided. Borrowers often think they know their credit score but often are not honest with themselves (or you) about it. If at all possible (and if authorized to do so), pull their credit or send them to www.annualcreditreport.com (for an FTC-sponsored report free to consumers every 12 months) or to www.freecreditreport.com, to obtain scores themselves. A clear picture of credit worthiness (and the ability to examine a borrower’s report for any issues) will eliminate a slew of potential problems that could come up down the road. Be aware that some free credit reporting websites have a wider spectrum of scores for borrowers and don’t give an accurate representation of credit. Make sure that the credit report range for the site your borrower is using is between 450 and 850; if your borrower is getting a credit score of 680 on a scale from 350 to 950, its going to significantly skew their actual credit risk profile.
Foreclosures, Bankruptcies, Judgments and Tax Liens:
These are all items which will almost certainly disqualify a borrower from conventional financing, and although lenders have different guidelines with respect to the timing and status of these issues, they are always viewed as negative. Be sure to ask your borrower, up front, if such issues exist and, if so, get a clear explanation of why, when, and what was done or is being done to remedy these action(s). If your borrower is unsure if he has these issues or you don’t feel he is being forthcoming, check the “public records” section of this credit report, it will disclose any of these potential pitfalls.
Clients almost always think their properties are worth more than they are. Do some extra leg work and check up on value. Call a local realtor, ask for a recent or even older appraisal, or look for recent comparables. A solid grasp of value, early on, will set clear expectations going forward. If you feel your borrower’s value estimate is unreasonable so will your lender. Save yourself some time and look professional in front of your investors by determining an accurate value estimate upfront.
There are very few lenders that can work around an environmental issue, whether conventional or private-money. If there is one, your deal will likely die, so ask about it up front and request a recent or even older Phase 1 report, if available. Often Phase 1 reports are very extensive and can be hundreds of pages; to quickly determine if there is a potential issue, skip to the “conclusions and recommendations” section and look for the words: “No further action”. If there is a Phase 2 or Phase 3 report, you likely have trouble on your hands. Phase 2 reports are only ordered when additional soil, ground water or further testing needs to be done. A Phase 3 report means that actual environmental remediation is being, or was done and this could be good or bad. If the remediation was completed and the state has given the property a clean bill of health then you are in the clear, if there are still lagging issues after a Phase 3 has been done—walk away.