Are you interested in applying for a farmland loan? Need to know what steps are involved in loan approval? Then, this guide is the right one for you. Loan approval can seem like a big issue because you think the steps are complicated, but not to worry, they aren’t. This guide will provide details on the steps of loan approval for your consumption.
5 Basic Steps of Loan Approval
The first step to loan approval is the application for a loan. Before a loan is considered for approval, there must be a proper and accurate application. A loan application requires specific documents and requirements, which vary due to the size, type of loan, and complexity of the necessity for the loan. Usually, fewer documents are required for smaller loans and vice versa. Here are the major documents and requirements for a proper loan application:
- Loan Application and Borrower’s Authorization to release credit
- Identification of Proposed Collateral
- Federal Tax Returns
- Income and Expense Forecasts
- Balance Sheets
- Financial Statements (up to the last 2-3 years)
- Current Market and Crop Inventory
- Equipment List
- APH Yield Reports
- Asset and Debt Statements (Bank Statements)
- Debt Schedule
- A/R and A/P Aging Reports
After submitting your application and the required documents, next step is the loan underwriting. Ensure all the documents and required details are accurate in their contents. False or incomplete documents may lead to disqualification of the application. The required information and details to ensure the application process is done right should be sourced from the lending institution or your local authority. You may also need to research the local rules and regulations on securing a farmland loan.
This phase of the loan approval process involves the expertise of an analyst, who would evaluate all the documents submitted to determine if you are eligible to receive the loan. Doing this allows the lender to know if you have the financial capacity to fund a loan. Debt, income, and history of borrowing are usually the things these analysts look into to determine your eligibility. The analysis is based on some yardstick known as the “Cs” of underwriting. They are usually grouped into three:
- Credit Reputation: This involves taking a critical look at your credit score to determine your eligibility. It is usually done with your credit score, accounts, payment history, and other associated documents. The analyst can use tools like Trans-Union and Equifax to determine your credit reputation fair and square.
- Capacity: This primarily involves your debt-to-income ratio to determine your capacity to pay back the loan. The debt-to-income ratio is determined by your salary, expenses, monthly housing bills, self-employed income, type of loan, and amount of borrowers. Additional liability or income like social security income or child support are also considered.
- Collateral: Since a land loan cannot provide a property as collateral compared to other traditional loans, the down payment is seen as the collateral. The amount you are willing to put down for the farmland loan will determine your eligibility. The higher the collateral, the higher your chances of securing the loan.
Loan underwriting may take some time due to the complexity of the request. The more entities involved, the longer it takes to analyze all necessary information to conclude.
Loan Decision and Pre-closing
After the loan, underwriting decides on the loan approval; this process is usually done as quickly as possible to respond to the applicant. The lender and the applicant then review the terms and conditions. If the decision is loan approval, the response and the terms and conditions are communicated to the applicant. If accepted, the next step includes an engaging appraiser, survey, insurance verification, investigation of proper documentation, and preparation of documents.
This step is known as the preclosing step, as these requirements must be met before closing. Fee calculation is also included in the pre-closing step and can occur at any point during pre-closing. Fees to be calculated include title fees that may be incurred during the closing process. It includes real estate commissions, property taxes, and recording costs. Once these requirements are met, then loan closing is scheduled.
Loan closing is when everything is in order, the loan is approved, and all that remains is to close the process. Loan closing helps relieve the stress and anxiety developed during the approval process. Now, you can sit back and proceed with the use of your farmland. Loan closing usually occurs at the attorney’s office, the title insurance company, or the lender’s office. All documents requested during the pre-closing phase are signed, and fees are paid accordingly. Copies of the signed documents are then given to both the lender and the applicant.
Loan Post Closing
The final step in the loan approval process is post-closing. You may be wondering why it takes place post-closing when closing has already happened? During the post-closing phase, the loan approval is finally wrapped up. Here, welcome information is sent to the applicant. Such a message includes information about the lending institution, accessing your loan approval account, and where and when to make your payments. In this phase, you will also receive documents that include details of the benefits of being a Cooperative member and the perks of patronage, plus its impact on your interest rate.
Knowing the basic steps involved in securing a farmland loan will help you fast-track the process. Once you start your loan application, ensure you have the necessary documents and get them submitted for the other processes. Before proceeding with your application, you may need to know the rules and regulations regarding loan approval in your locality.