Avoid getting stuck at “no” in the underwriting process

Underwriting for real estate investors can be a little different than underwriting for a normal home buyer. If they don’t prepare the right way, it can be easy to get stuck at “no” during that process.

My whole start in bookkeeping for real estate investors began with a conversation with my dad. I told him I was starting a bookkeeping business. He said, “If you want to have a niche in real estate investors, that would be a great idea! Everyone brings their stuff in on the back of a napkin, and I can’t lend on that. I have to turn a lot of people away.”

I thought that was a great idea, so I set out to learn what I needed to know to help real estate investors with their bookkeeping. And a huge part of it was helping them get them ready for the underwriting process.

Two stages to the underwriting process

There are two stages to underwriting. The first stage is automatic: You gather all your details. That includes W-2s, paystubs, tax returns, and other related information. You give it to the loan officer at the bank, and she puts it into a computer. She hits calculate, and the computer essentially spits out a “yes” or a “no.”

A “yes” means that you’ve never missed a credit payment, you’ve got a healthy credit score, everything is great, and it’s easy to lend you money. As you might imagine, that’s rare for a lot of people, especially real estate investors. So if you get a “no,” you move on to the second stage.

The second stage is manual. There’s an underwriter, and he’s usually working underneath the loan officer. They’re looking at all your details manually, and they’re trying to make a good assessment of whether or not they can give you money.

Of course, the details are different for each person that applies for a loan. With real estate investors specifically, you may apply for six loans a week, have a lot of refinances, and have a lot of short-term debt. All of that can easily result in bad credit. You can’t really do anything about it though, because it’s part of the business model with real estate investing.

The difference for real estate investors

The manual underwriting process can look a bit different for real estate investors. Now the underwriter is judging things on a whole different set of criteria. And often real estate investors show up at the bank with numbers jotted down on the back of a napkin, or maybe with an Excel spreadsheet. And they can’t get the loan they want with that.

Instead, you need to have the right numbers on the page, they need to make sense, and you need to be able to back them up. That’s what I help a lot of my clients with.

Keep in mind, a lot of different people are going to look at those numbers. It’s going to be your banker, it’s going to be your underwriter, and it’s going to be a board of directors at the bank, especially if it’s a community bank.

In fact, it’s important to note that your best bet is a community bank. A lot of times big national banks will just give out a flat “yes” or “no.” The underwriter there can’t go have a conversation over breakfast with their board of directors. At community banks he can, and that’s where a lot of the power of the community banks comes into play.

So what I try to do is make it easier on the lender while also making it easier on the business owner. I go in and lay out the data the right way, gather the right documents, and prepare everything professionally with clear headers and identification. The banker and underwriter can flip through two or three pages, see that they’re dealing with a professional, and know that it’s worth having a conversation.

Suddenly you don’t get stuck at “no.” Instead, it’s “How much?” and “Why” and “What can we do to make this number go up or down?” It’s a much better conversation for everyone.

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