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Private Lending (4) – Key Points of A Deal
Continuing from the last post, Jen was amazing. For several days straight, she patiently taught me how to underwrite the deals, page by page, line by line.
The processmainly consists of three parts: the borrower, the property itself, and the numbers. We discussed each part in detail.
Firstly, the borrower.
When it comes to borrowers, we mainly examine the loan application materials and credit reports. Firstly, we need to verify various IDs to prevent fraud. At the same time, we need to ensure that the personal details and IDs on the credit report match. In this line of work, incidents of ID fraud and mismatched IDs with loan documents are not uncommon, so we need to be careful in this area.
Many times, most people just look at the credit score. However, if it’s your own money, you’ll realize that’s far from being enough. You need to go through the credit report line by line, analyzing each detail, focusing on the following key areas:
– Has the borrower opened many credit cards and taken out many loans?
– What is the repayment pattern for the borrowed cards or various debts? Are there any instances of late payments? If so, how frequent and for what amounts?
– Does the borrower have any bankruptcy records? If so, how long ago?
– Have all borrowers submitted credit reports? If not, why hasn’t the missing one been submitted? If it’s due to lack of availability, why is it unavailable? Is it because they’re new immigrants or intentionally hiding something? Even if it’s missing, you need to see that blank file and match the personal information.
– What is the borrower’s average monthly expenditure? How much of it is flexible spending, and how much is essential spending that cannot be cut?
– If the file is clean but the borrower keeps borrowing money, do they have any addictions like gambling or substance abuse?
The credit report is mainly used to extract information about the borrower’s spending habits. Income status needs to be verified through the application materials. Mainly:
– Do they have any income?
– If so, how much is their real income, and is it stable? This requires various methods to investigate. We usually don’t rely on the contact information provided in the application but instead go online to check the borrower’s employer information directly and contact them officially. Faking employer letters and bank statements is too easy. Sometimes, during good market times, the fake documents look pretty good, but during bad times, they’re poorly made 😂.
– If they claim to receive money from a certain government project, we directly check the source documents of that project on the official website to see the conditions for receiving money. Most of the time, borrowers are just talking nonsense.
– If one party’s income relies on post-divorce subsidies, we need to directly check the divorce documents and make sure it’s the final version. Most of the time, what borrowers tell us is wishful thinking, and the final settlement has not been reached by all parties.
– Also, we need to check the borrower’s age and occupation. If the age and occupation don’t match, there’s a risk of fraud. Once, we received an application from a very young man with an income close to seven figures. It wasn’t from investment banking or finance, and our investigation concluded that it wasn’t a family business either. Moreover, the salary from the employer didn’t make sense for that line of work. After our inquiry, there was no response.
After checking all these details, both on the expenditure and income side, you’ll have a pretty good understanding. Then, you can calculate the loan amount into the expenditure and see the debt ratio, to see if it’s manageable.
However, in reality, after almost 10 years of experience, this part isn’t too important. We’ve lent to countless people with no job, no income, and extremely low credit scores, and there haven’t been many issues. Why? We’ll continue the discussion next time!