Many investors ask us, “What are the deciding factors from an underwriting perspective as to why a loan should be recommended for approval vs. being declined?” At Verdeo, we consider underwriting to be a key differentiator and one of our competitive advantages when deciding whether or not to invest in one of the private notes we are endorsing. Our team of experts ensures that careful consideration has been given to each underwriting decision prior to a recommendation for approval or decline. Our due diligence process consists of three key components, which we often refer to as the “3 C’s.”
- Common Sense – Does this loan make sense? This is the first question we ask when initially reviewing a potential loan file. It is also the last question we ask prior to issuing our final decision. In the world of private money lending, things are not always “black and white.” If so, these borrowers would likely be pursuing financing through more conventional means (banks and / or other lending institutions). From an underwriting perspective, we want to understand why these borrowers are pursuing private financing. Are there other options they should consider first? What is the “big picture” regarding their circumstance and how do we fit in?
- Collateral – This is without a doubt the most important factor when making an underwriting recommendation. Our goal is to position the investors note in as secure of a position as reasonably possible. Loan to Value (LTV) is critical in order to ensure the viability of the investment note. What real property will this note be secured against (primary residence, rental property, 2nd home, commercial building, land, etc.)? Is there an opportunity to “cross collateralize” against multiple properties in order to more fully secure our investors position. What will the investors position be as a lien holder (1st, 2nd, 3rd, other)? Have we obtained realistic appraisal values of all real property being secured against this note? These are all questions that must be addressed prior to issuing our final recommendation.
- Credit – When making an underwriting recommendation, it is imperative that we have an accurate understanding of the potential borrowers credit history. What is their FICO score and, if it is low, why? What derogatory issues need to be understood (history of late payments, foreclosures, bankruptcy, excessive outstanding credit balances, etc.) Specifically, what has their mortgage payment history been? In a nutshell, we want to understand the person we are dealing with and manage our exposure to risk accordingly. Credit reports tell us a lot, but they are not always the full story. This is where our expertise comes in to play. Prior to issuing our final recommendation, it is important that we get to the “root” of the potential borrowers situation and make our recommendation based on material fact and what we know to be true.