Lenders have raised the bar on underwriting guidelines in recent years, and more specifically in the COVID era. Back in the good ‘ole days, prior to the Great Recession and now COVID, lenders did what might be now described as a cursory job of underwriting the borrower. They typically asked for a simple financial statement, personal & business, with a credit check, and that was the extent of the credit items required.

Back then, they focused almost exclusively on the pros and cons of the property. And if they liked the risks associated with the property, it was very likely the loan would be approved with only a glance at the borrower.

But as you undoubtedly know all that has changed in recent years.  In today’s environment, lenders have upped their borrower documentation considerably requiring an extensive amount of information about the borrower.

Under today’s lender guidelines the borrower would do themselves a favor if they were proactive about providing their personal documentation at the same time as the property documentation. Doing so strongly suggests that you, the borrower, are a knowledgeable and seasoned investor.  Instead of slowly dripping in the required documents over a couple of weeks or so, have them all prepared to give to the lender right from the get-go.

And what might you expect the current menu of items to be?

  1. A complete, professional looking personal financial statement. Each lender has different requirements but they typically require the borrower’s net worth to be equal to or greater than the loan amount. Some require a borrower’s net worth to be as much as two times the proposed loan amount.  Ask the lender before you send him your financial statement what is the minimum net worth to loan ratio.  They should know this and be willing to give it to you. If your net worth exceeds this ratio then proceed with sending him all your personal documentation.
  2. Liquid Assets:  Here each lender is different also, but they typically require liquid assets showing on the borrower’s balance sheet equal to 6 to 12 months of debt service. Again, find out what your lender requires before signing the application.
  3. Complete an REO (real estate owned) Schedule: Most lenders now create a global cash flow spreadsheet on the borrower. They want to see if the prospective borrower is generating a positive cash flow, or slowly draining himself of all his cash.  For an active or experienced investor, much of the detail required to determine his global cash flow comes from the REO schedule.  Prepare the REO schedule before you begin talking to lenders so that when they ask for it, it’s ready for them.
  4. Credit Rating:  Provide a written explanation of any 30-day late payments:  Run a credit report on yourself before you start looking for a lender. Find out your credit score.  Most lenders require that your credit score be a minimum of 680.  If yours is not that high, provide a good written explanation of circumstances leading to the lower rating.
  5. Explain Past Tax Liens, Judgments, Litigation:  Have written explanations with back-up documentation already prepared before you sign the application. Give the prospective lender your explanations and have him verify in advance of signing your application that your explanations are satisfactory and will not impact loan approval.  Do it before you sign the application when you have the most negotiating power, not after when you have little or none.
  6. Tax Returns, not just Schedule 1040s, signed and dated including all K-1s:  Lenders want ALL of your federal tax returns, not just parts of them. This includes providing all of your K-1s.  To speed up the process get this done correctly the first time.


“Time kills deals!”

A lengthy, drawn out loan underwriting process pending documentation to show up will at the very least move your deal to the bottom of the pile. And it has the potential of killing the deal altogether.  These borrower underwriting guidelines can be verified quickly if the borrower is proactive and anticipates what the lender is going to require.  A borrower should work towards making the lender’s process as easy as possible.

Many if not most borrowers go to the lender expecting them to ask for what they want … which they’ll do.  But you’ll be ahead of the game if you approach them with the above docs ready & available.

In today’s COVID environment, many lenders conduct interviews by phone, or lately by ZOOM.  Documents requested are then asked to be scanned and emailed – plan on this.  Don’t offer to FAX them – legibility falls off rapidly during FAXing causing repeat effort.  If you don’t have a scanner, get one – a small investment to make to get your loan.  And don’t try to scan documents with your phone.  Your phone program treats each page of a document as a photo, not a document.  For instance, a 20-page document when received, has twenty 1-page files, not one 20-page file.  Reassembling this doc takes extra time to process your loan, and your loan is either shuffled off to an over-worked assistant or stuffed to the bottom of the pile.

If we may facilitate this process, give us a call at Counsel Mortgage.


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