LET’S TAKE THE MYSTERY OUT OF THIS.
A frequent question from borrowers, especially first-time borrowers, is why the lender needs so much information? It may seem like a lot and somewhat unnecessary from the borrower’s perspective, but the lender wouldn’t be asking if the information wasn’t critical somewhere in the application, approval, documentation or closing process. Everybody answers to someone, lenders included, so proper analysis and documentation is paramount for the borrower’s protection as well as the lender’s.
Below are some of the key steps of the lending process and requested information for ag real estate loans is explained. There are many other items not mentioned here but may be just as crucial to the process.
- The Application
This is the starting point in the loan process, usually right after some initial conversation with the borrower. The application form should be filled out completely and as accurately as possible. This will likely be the lender’s first look at the borrower whether as an individual, a partnership or a corporation with multiple entities. The loan amount requested must be stated as well as the uses for those funds. The applicant will include what is being offered as collateral, the collateral value, and the estimated loan to value (LTV). If the LTV exceeds what the lender is able to approve, the process may stop right here. Several legal questions regarding lawsuits, bankruptcies, etc. are also key to moving forward depending on the answers. Additional questions regarding collateral such as; easements, improvements, water and environmental issues will also be covered.
- Financial Information – The Analysis Process
Once the application has been reviewed and it appears the lender can move forward, financial information must be submitted. There are two key elements with financial information: historical and projected. Usually at least three years of past financial statements and tax returns will be requested. ‘How can you predict the future if you don’t know the past?’ Historical performance and profitability will be heavily scrutinized. Usually reviewed or audited financial statements are required. Along with that, total debt coverage, debt to asset and current ratios, along with net worth, will be studied. An often-overlooked number is the credit score. Borrowers should watch and maintain a high credit score, as low scores alone could be a reason for rejection. The next step is to analyze what will happen with the requested loan in place. How are the above-mentioned ratios affected and what would a pro-forma balance sheet look like? Accurate cash flow budgets will be required for the current period and for the next year.
- Approval and Closing
Once the items above are analyzed and fall into the prescribed acceptable ranges, the loan will be approved with or without conditions. LTV may be required to be under a certain percentage, guarantors required, etc. Usually at this point a good faith deposit may be requested, as a real estate appraisal will be ordered by the lender and the majority of that expense should to be covered by the borrower up front. At this point, verification of many of the items mentioned in the application will need to be provided: property descriptions, loan balances, corporate documents, credit authorizations, environmental disclosures, etc. A title company will then be assigned, and the loan will proceed with closing.
Another question most borrowers ask is ‘how long will this process take’? The simple answer is: much depends the borrower. If all the key information is provided in one complete package when requested, the process can move very quickly. If the information dribbles in over time, then the process is delayed while waiting for the applicant to provide information.
Communication is always key. Stay in frequent contact with your lender. Don’t be afraid to ask questions along the way.
If you’re ready to refinance or make your next land purchase and have questions, start the process by contacting a Conterra Ag Capital lending specialist today.