Real Estate Financing and Investing/The Loan Process
Financial intermediaries providing the funds for development and purchase of real estate have traditionally taken a conservative approach towards the amounts they lend and the requirements the borrower must meet before securing the loan. This is no doubt partly due to the fact that the largest providers of credit are highly regulated by both federal and state agencies. Consequently, the loan process followed normally involves a number of steps, explained in the discussion that follows.
Qualifying the Borrower
The loan process begins when a potential borrower approaches either the lender or a representative of the lender with the intention of securing a certain amount of money. Historically, loan-to-value ratios were much lower than they are today and subsequently in case of default the lender was in low risk position. However, as loan-to-value ratios have increased, it has become necessary for the lender to look beyond the property and thus qualify both the credit and the financial ability of the borrower to repay the loan. This involves the filling out of a loan application which asks for employment, credit history, assets, liabilities and other personal information. Once this information is obtained the lender then verifies it. When it is verified, the lender can make a credit evaluation that becomes an important input into the final loan decision.
Qualifying the Property
Lenders are not in business to foreclose on property; rather, they are in business to lend money, charge interest on that money and hopefully receive payment of both interest and principal. However, under certain condition, both within and beyond the control of the borrower, the lender may find it necessary to foreclose on the property used to secure the debt.
Factors such as location, age, condition, surrounding land uses and general economic conditions all have an effect on the value of a piece of real estate. For most mortgages the amount of money loaned will be based on either the contract sales price or the appraised value, whichever is less. Therefore, before making the loan decision the value of the property must be estimated by the lender or someone employed to do so.
Qualifying the Title
So as to determine the lien position of a mortgage given on a piece of property, the lender seeks to qualify the title by examining the public records and tracing the legal history of the property. The lender normally desires a first lien position which can be determined by an abstract of title. Also, since the lien is on a piece of property, the lender wants to be assured that the property being offered as collateral is the same piece being purchased; thus a property survey will also be conducted prior to closing the loan transaction.
Closing the Loan Transaction
Once the buyer and the property have been qualified and after the lender is confident that title to the subject property is free and clear, the final step in the loan process involves closing the loan transaction. Depending on where one resides in the United States, the title closing process is referred to as a closing, settlement, or escrow. In California title closing is conducted by an escrow agent who is a neutral third party mutually selected by the buyer and seller to carry out the closing.