Documents Required for Loan
To get a loan from a bank or any lender, you must prove that you are the eligible person. There is documentation that allows you to do this. Documents Required for Loan varies for each loan type, and different lenders’ document requests may differ.
Here we will try to give information that covers all of them in general. Therefore, do not think that you will be asked for all these documents when you are going to get a loan.
What Are the Documents Required for Loan?
The most common of the document systems that can be very different, and the series of documents starting with “Executive Summary” is the document system that will be discussed here.
Executive Summary, the first of the documents required for Loan
Before compiling your “submission package”, write your Executive Summary. This will be the outline to complete the submission package and will allow being-reviewed your loan request for a matching lender before you spend money on third-party fees. The “Executive Summary” is the most important document in the Documents Required for Loan.
The Loan Submission Package for a Commercial Loan
A loan submission is a package of information presented to the lender that includes much more than the application form itself. The submission must be a comprehensive presentation of both the borrower and the project. It describes all of the physical attributes of the subject property, color pictures, its income-producing ability, and an estimate of its probable or continued success, along with a financial evaluation of the prospective borrower.
“Loan Submission Package” is the most important set of documents after “Executive Summary” in Documents Required for Loan. It is a detailed analysis of both current conditions and estimated future conditions. Data contained in the submission should be sufficient for the lender to make a decision as to commitment or rejection. The purpose of a loan submission is threefold. It should demonstrate:
- The project’s compatibility with the lender’s goals and philosophies.
- The project’s ability to produce a sufficient income stream to cover debt service, taxes, insurance, and operating expenses.
- The financial eligibility of the borrower.
The Application Form in Documents Required for Loan
Whether the loan application is a preprinted form or merely a letter from the applicant, certain standard information is considered essential among lenders. Most lenders prefer to use their own preprinted forms to ensure that all of the information they require is indeed obtained. Most lenders will require that a follow-up application, signed by the applicants, be submitted if they intend to fund the loan.
The “Application Form” is included in the Documents Required for Loan for almost any types of loan requests. A preprinted application commonly contains the following parts:
- Applicant’s name.
- Mailing address.
- Individual guarantors.
- Construction or permanent loan terms.
- Description of security and color pictures.
- Special conditions.
If the applicant is a corporation or partnership, a list should be included of individual officers who are authorized to sign. This indicates the project’s form of ownership to the lender. The form of ownership determines the liability of specific individuals.
Where should the commitment letter and other correspondence be mailed? To what address will the billing statement be sent? Where can the borrower be contacted if problems arise during the term of the loan?
Signatures of persons guaranteeing repayment of the loan are not required on all loan programs. The requirement of an individual guarantee depends on whether the decision to lend is based on the credit of the borrower or on the project’s anticipated generation of income. A construction lender, for example, generally holds a borrower personally responsible to repay the loan whereas a permanent lender may rely more heavily on the economic viability of the project. As with many other aspects of a commercial loan application, the answer to the question of requiring a personal guarantee depends upon the exact circumstances of each loan application.
Construction Loan Terms
If the application is for a construction loan, the loan amount, term in months, interest payments and principal payments need to be specified. An additional agreement included with the construction loan terms may be the stipulation that the borrower provides evidence of a firm commitment for the permanent loan and that the terms of that commitment be acceptable to the construction lender.
Construction Loan Fee
This fee is expressed as a percent of the total dollar amount of the loan. Fees typically range from 1 to 3 percent. Payment may be due at the time of application, at the time of commitment, or at some other time as required by the lender.
Permanent Loan Terms
Basic items, such as amount, rate; term in months, and payment schedule, must be included here, the same as with the construction loan terms. Depending on economic conditions and management policy, a penalty may be charged for early repayment of the principal balance due. As will be understood, the Permanent Loan Terms relate to the construction loan request, it takes place in Documents Required for Loan.
Permanent Loan Fee
This fee, like the construction loan fee, is expressed as a percent of the total dollar amount of the loan and may be due and payable at a time specified by the lender.
Description of Security
Information on the property to be secured should be as thorough as possible. Whether the application is for a construction loan or a permanent loan, the legal description of the property should be obtained and verified. An accurate legal description ensures that the lender obtains a lien on the same property that it has inspected and on which it has committed funds.
Other data on the property, if it is an existing project, are age, number of units, purchase price, number of square feet, price per square foot, the value of the land, and amount of monthly rent. On a new construction project, the lender needs to know the value of the land, the value of improvements on the land, and the cost of improvements to be made. On all construction projects, a line item detail of construction cost should accompany the application.
Additional Information Needed in Documents Required for Loan
Additional information supporting the loan application should include a detailed analysis of the borrower’s financial background with the description of the project. The goal of every form included in a submission is to clarify, highlight and detail all pertinent facts about the borrower and the project. Quality of information, not quantity, is the hallmark of good loan submission.
The Borrower’s Financial Background
A lender will typically examine the previous three years of an applicant’s financial history. Most lenders consider three years to be an adequate time period to demonstrate a pattern of business activity. A shorter time period may focus too strongly on recent short-term successes or failures while ignoring the applicant’s overall investment and development expertise. Longer time periods may contain outdated information or require such lengthy staff time to analyze as to make it unjustifiable. If the applicant is a corporation or partnership, personal statements from the principals may be required in addition to statements from the business entity. Federal tax returns, balance sheets, and income statements should be obtained for the previous three tax years.
Federal Income Tax Returns
This should be the easiest document to obtain. Every applicant has filed a tax return. Failure to file a tax return is a clear indication of an applicant’s credibility. The same may be true of an applicant who furnishes the lender with a tax return and with a sly smile tells the loan officer the figures were somewhat underestimated for Uncle Sam. A business person who is dishonest with the government may also lack integrity in his or her capacity as a borrower.
The heading on the first page of the tax return contains the formal name and business address of the company or partnership, its tax identification number, and total business assets. All of these items serve as an official verification of information supplied on the application.
The remainder of the first page is separated into the categories of gross income, deductions, and taxes. Gross income is a total of profit plus interest and dividends, rents, royalties, and capital and ordinary gains. Some of these categories, such as dividends and gains, are expanded even further on a form attached to the tax return. The deduction section contains a breakdown of all items that reduce the gross income to taxable income.
The total taxable income is the business’ profit before taxes. The answer obtained in the tax section indicates the amount of taxes either due or refundable. The profit of a business and how it obtains that profit tells an important story to a lender. If profits appear too high or too low compared to industry standards, perhaps closer scrutiny of the whole spectrum of business operations should be pursued in order to further evaluate the competency of management.
Schedule L, “Balance Sheets,” is an itemization of total assets and liabilities. The item-by-item listing compares the beginning of taxable year figures with the end of taxable year figures. Such a comparison shows the financial changes that have taken place in the corporation. However, the balance sheet does not state the quality or liquidity of assets. Quality and liquidity of assets refer to the extent of their depreciation, their physical condition, and their ability to be sold quickly without loss to the business. The balance sheet is actually an equation:
ASSETS = LIABILITIES + STOCKHOLDER’S EQUITY
Assets are what the business owns, liabilities are what the business owes, and stockholder’s equity (owner’s equity in the case of a partnership) is the portion of assets free from other encumbrances. Stockholder’s equity is also referred to as net worth. This equation is unalterable; one side of the equation is always equal to the other side. Therefore, a change in one category necessitates a change in another category. If liabilities are increased, then there must be either an increase in assets or a decrease in stockholder’s equity.
The income statement is a complementary statement to the balance sheet. The bottom line of an income statement is the net income or the difference between revenues and expenses which has occurred over a period of time. Whereas the balance sheet provides a financial status report as of a given date, the income statement is an action picture of what was used and what was gained in achieving this financial status.