The banks and financial agencies often lend money to borrowers no matter the risks involved in the process. When it comes to commercial mortgage and procurement, the lenders have no better option but to release funds to high net-worth customers, organizations, or class A or class B properties. The financial downturn in any country also makes loan giving and recovering a challenging process. There is no doubt about the same. Today, some lenders can make the lending process simple and hassle-free and improve the chances of secure financing. They decide on the loan amount to offer and target the right borrowers who repay on time.
When offering loans, the lenders should think like the customers. Sometimes, banksneed to procure a huge amount of loan facing mammoth challenges and then offer the same to borrowers. Therefore, every lender or bank will ensure that it can recover the borrowed sum on time without fail. There is no other option left when the loan is huge. The lender should focus on the borrower’s cash flow and property value in case there is a repayment issue later.
According to an article published on https://www.inc.com, the lender must keep detailed records of a borrower’s assets if it is a high-value secured loan. In case of non-payment, the bank should have the right to sell the property and recover the unpaid amount. They should find a suitable customer, sell the property, and recover the funds. The bank or lending agency should look for these three things before approving a loan. Read on to get your answers.
1. Borrower’s liquidity
The word frequently misrepresented and considered a borrower’s minus point or weakness. It’s one of the main reasons why many lenders refuse loans to customers. Liquidity is an asset that a lender can convert into liquid cash, within three days, if the borrower declares he or she cannot repay the loan anymore. When it comes to liquid assets, it means cash, marketable security, bonds, and stocks.
There are other aspects like pre-funding and post-funding liquidity.The lenders must focus on these aspects when lending money. Pre-funding liquidity is the cash available during down payment, capital improvements, operating capital, and replacements. The best way to figure out the liquidity is sufficient or not is that simple. The lender should create sources and uses of funds schedule.
On the contrary, post-funding liquidity is essential because lenders would like to see additional or excess cash post-closing. This way, borrowers have enough reserves for things like immediate repairs, capital replacements, working capital, renovations, repairs, and deductions for insurance claims. All these are applicable for mortgage loans.
Usually, the extent of liquidity should be equivalent to at least 10 percent of the borrowed amount or approximately a year’s worth of loan service. These little things matter to lenders and therefore, they should keep in mind these aspects before releasing funds to customers.
2. The net worth of the customer
Before signing the loan agreement, the lender must learn about the borrowers’ net worth. It is not as simple as deducting the liabilities from the assets. It will not give banks an accurate estimate. The lenders will ask about the value of the assets when borrowers do not have supporting papers to prove the same. It is essential to get an estimate of the market value of the customers’ assets.
Generally, borrowers do not overestimate their liabilities. On the contrary, they overstate understate them. Therefore, an overstatement of assets and an understatement of borrowers’ net worth lead to incorrect computation of net worth. There is no doubt about the same. Besides, one can learn more about the eligibility criteria for availing loan on platforms like Liberty Lending and similar ones.
The lenders can figure out a borrower’s net worth on their financial statements. It includes a statement of income and a balance sheet having supporting schedules providing details for the worth mentioned on the main balance sheet. Usually, borrowers do not provide additional information for banks to figure out whether the asset value is realistic or not. Or equity in the asset is market equity, genuine cash equity, or both.
Lenders like to make fast decisions. Therefore, missing on crucial financial information about borrowers will not help much. The borrower to retain the interest of the lender must examine their financial statements carefully. The lenders will help customers to get the necessary details, answer questions, provided borrowers ensure that all schedules are self-explanatory. The rule is, the borrower’s net worth is greater or equivalent to the amount of money borrowed.
3. Cash flow
When it comes to a personal financial statement of a borrower, it means a balance sheet, statement of cash flow or statement of income. The cash flow statement is never accurate even if complete. The customers applying for loans may have more than one income source like W-2 salary, real estate income, or investments in businesses. All these aspects must be considered when assessing the cash flow of borrowers.
Free cash flow means the funds available after paying all operational costs, debt payments, mortgage payments, and federal income tax. The borrowers use the left amount as they prefer.
When lenders compute a borrower’s free cash flow, it helps them to figure out how much money they have to shell out for mortgage payments in case there is a cash flow disturbance at the property level. In case, the borrowers lack enough cash flow, they will miss on mortgage payments or default if their property has some cash flow trouble.
The greatest challenges of lenders or banks are learning about borrower’s actual cash flow. The cash flow statements may seem fine but during the payment time, the problems arise. Checking every document is a cumbersome and tiring task for the lenders. The solution is an imprecise cash flow statement that creates more doubts in the mind of the lenders than answer their questions.
If a lender cannot understand the cash flow of a borrower, then the bank or lending agency cannot possibly approve a loan. Therefore, borrowers should reveal all details and not hide them.
Now that these aspects are available for the lenders to assess, the loan approval process becomes easy and simple for borrowers.