AUTHOR: Ben Lyons
Perhaps I am being too blunt or direct when I ask borrowers “are you lazy or stupid?” when I receive a loan submission that is very poor. Your loan submission should impress lenders rather than convince us not to lend you money. I shake my head and say to myself, “if they are this lazy in providing details up front, they will be just as lazy when addressing the details in renovating or building the home.”
Let’s get this out in the open right now – get all your information together, organized, and well-presented up front, before you submit it to a lender. Prefacing your submission with a clear and concise cover letter is also a great idea - you need to show the lender you are prepared, organized, and have thought through the details of your real estate project.
In case you are not sure what you should submit to a lender to impress them, here are some tips:
Tips for Creating a Great Construction Loan Application Cover Letter
TIP 1: Start with an introduction to your construction project
Your cover letter is basically an introduction to your project. This is a great way for you to prove to your private money lender that you are serious about your loan, but also to get your thoughts and details in order for your records. Here is an example:
“Mike Smith Construction is looking for financing for the purchase, renovation, and resale of a home on 123 ABC Street, Main City USA. My company has executed a contract on April 24th with a target closing date of May 24th. My goal is to borrow $162,000 or up to 70% of the value of the property when completed. Please review the information below when considering my loan request.”
TIP 2: Provide the details of your real estate transaction AND include relevant documents
Your potential lender wants - scratch that needs - to know the numbers of your real estate deal. Use this section to help lenders cut to the chase. This will save you and your lender time during the approval process. Keep it short and sweet but include the key information from the example below:
The details of my transaction are:
- Purchase price is: $125,000 (see attached Purchase Contract)
- Renovation costs are: $50,000 (see attached Contractor Estimate)
- After renovation value is: $250,000 (see attached CMA or Realtor Comps)
- My renovation period is: 120 days
- My projected profit is: 40,000
- My realtor is: _____________
- My title company is: _______________
- My Insurance agent is: ____________________
- My contractor’s name is: ______________
TIP 3: Provide the details of your financial profile and past experience
Impress lenders with your transparency about your history and experience as a real estate investor. This also gives you the opportunity to justify or explain details that may not fit the lender’s standards and highlight your more impressive experiences. For example:
The details of my financial profile are:
- I have a 645-middle credit score
- I have $68,000 in liquid assets
- I have a net worth of $390,000 (see attached Financial Statement)
- I earn $8,400 a month in income as a contractor for XYZ contractors
- My total expenses are $6,400 per month
- I have 6 months cash reserves after purchasing the property for debt service
- I have available credit of $40,000 should I run into cost overruns
The details of my experience are:
- I have been a licensed contractor for 12 years
- I have built or renovated 18 homes in the past 5 years (see attached Resume)
- I have expertise in building single-family homes
- I have attached 3 references from past lenders or clients
TIP 4: Make it easy for lenders to find the information they need
Not only should you include all of the relevant documents you’ve referenced above, you should share a list of those documents as well. That way, lenders can let you know immediately if something is missing. The harder you make it for lenders to find your info, the less likely they are to approve your loan. This can be as simple as:
The following documentation list is submitted with my loan:
- Purchase contract
- Scope of work with estimated costs
- Plans or specifications, if new construction
- CMA or comps from my realtor
- Contractor’s license
- Contractor’s insurance
- My last 2 years of tax returns
- My financial statement
- 2 months bank or other statements showing liquid assets
- Experience or reference list from other lenders or clients
The more questions you answer up front, the better the loan response will be from the lender. You should invest the day or two it takes to organize all the information and provide the entire loan file all at once and up front.
How should you approach and communicate with construction lenders?
It’s not all about the cover letter. Your communication with lenders can make or break your deal as well. Set yourself up for success and help make sure you are a good fit with these tips.
- Ask construction lenders if they make loans based on the location and loan type you are looking for.
- Ask construction lenders a series of questions to help you determine if they have a system of competency that meets your needs. For example:
- How long has the lender been lending money?
- Ask the person you are speaking with what their role is with the company and how long they have been in the lending business.
- Ask how the process for loan approval works to include time commitments and documentation.
- Ask the lender exactly what the underwriting requirements are for your specific loan. Do they have the underwriting requirements in writing they can provide
- Get details on the range of best- to worst-case for loan pricing to include interest rates and fees.
- Ask the lender what is required to get the best interest rate and lowest fees.