Underwriting the Loan on Your 1031 Tax Exchange Property

What does the loan underwriting process encompass? What are lenders going to look at when you are trying to obtain financing for your 1031 Tax Exchange Replacement Property?

Before lenders started creating loans at eighty to ninety percent (80-90%) of property values, there was little emphasis placed on qualifying borrowers’ ability to repay the loan. Back then, loans were originated at fifty to sixty percent (50-60%) of the purchase price of the property. If a lender needed to foreclose on a property, it would be very easy to sell the property and regain the amount of the loan.

Today, lenders often lend with relatively high loan-to-value ratios (LTV). Their loans can cover eighty, ninety or even one hundred percent of the price of the property. As a result of this increase, lenders now look for more security when originating their loans.

Formal real estate lending usually begins with a loan application. This is a standard for that is filled out for the lender that includes details of the property being financed as well as details about the borrower. Most applications include the borrowers employment records, historical income, financial statement and credit references.

The borrowers financial statement is a list of all the assets and liabilities that gives the lender a sense of the borrowers net worth, and their ability to repay the loan should something go wrong. Assets consist of all things that the borrower owns that are of value. This includes cash, automobiles, real estate, jewelry, investment portfolios, life insurance policies, etc.  The Fair Market Value of each item is listed on the financial statement representing what the item could be sold for, not its original purchase price. Lenders pay special attention to a borrowers cash position and their money management habits. Liabilities are all the monetary obligations of the borrower. These include automobile loans, credit card debts, real estate loans, medical bills, insurance premiums, accrued and unpaid taxes, alimony, child support, etc. After the lender has compiled this list of assets and liabilities he will have a sense of the borrowers net worth, how much their assets outweigh their liabilities.

After the financial statement is complete, the loan officer that is in charge of processing the loan on behalf of the lender begins a data verification process. The loan officer will call various references, banks where deposits are held, the borrowers employer, etc.

Simultaneously with the data verification process, the loan officer will request a credit report for the borrower. This report is a compilation of information accumulated from a thorough check of the borrowers credit habits as well as public records to discover if any lawsuits are pending.