Understanding Loan Closing Delays: Ensuring Security Every Step of the Way
Delays are a reality of the real estate industry, whether it is in getting the loan closed, the development or the construction phase. If you have ever purchased a house before, there is a good chance you experienced a delay in closing on your home; or you may have heard the horror stories from friends and family. Regardless, the same thing can happen in commercial lending, including Trust Deed investments at Ignite Funding. There are so many moving parts to close a loan between the borrower, the lender, and the Title company, that delays are just inevitable. The frequency that Ignite Funding funds loans on a monthly basis will of course subject us to more potential postponements.
So, what exactly can postpone funding a loan? There are too many unique occurrences to list them all, but some of the most common arise from what is uncovered during the “title search”, or research, performed by the Title company on the respective property. Other common contributing factors to delays are borrower contingencies not being met on time or can even be caused by Ignite Funding clients.
The Title company’s research is important.
Verifying the first lien position.
For Trust Deed investments, one of the primary functions of the Title company is to verify that the loan being brokered by Ignite Funding is in first lien position. The Title company confirms that there are no “broken priorities” or other liens (i.e., mechanics liens, loans, etc.) that would supersede the loan. If preceding liens are discovered, then Ignite Funding will work with the Title company to get a “release” signed by the 3rd party lien holder and recorded on the Title of the property.
This process can unfortunately take some time to be negotiated and executed, causing the close date to be extended. However, ensuring the integrity of the lien position of the loan is more important than closing the loan. Foregoing the clear-cut, first lien position would create greater risk to investors, as this would compromise their ability to seek recourse on a defaulted loan.
“If Ignite Funding is unable to achieve a release on the preceding lien, then we will not follow through with funding the loan. That is how important mitigating risk for our clients is at Ignite Funding,” affirms Pat Vassar, Ignite Funding’s Director of Underwriting.
Ensuring a “clean title” on the property.
The second key function of the Title company is to research the full history of the property’s ownership to verify that the respective property has no other claims on the respective property. This process can also uncover issues such as property line disputes. If other claims or other property related issues are discovered, then Ignite Funding will work with the Title company to get a “release” signed by the 3rd party claimant and recorded on the Title of the property. Again, this process can take time, but if there is no clear-cut way to resolve the claims then Ignite Funding will not take the risk, and therefore not fund the loan.
What are borrower contingencies?
Ignite Funding will often negotiate with borrowers to get certain items completed prior to closing the loan. For example, for a land acquisition project, Ignite Funding could require that certain plans (i.e., zoning, entitlements, plat maps, etc.) be formally approved by the respective city or county prior to funding. If the borrower is unable to execute this on time, then Ignite Funding will offer to extend the close date until completed. Stipulations like these are often put into place to help further reduce the risk of these investments to our clients.
Investors play an instrumental role too.
If you are a current client, you know that we ask investors to turn-around their investment paperwork and send in their funds as quickly as possible, ideally within 3 to 5 days or sooner depending on the close date of the loan. If a large number of investors do not complete their part of the process in a timely manner, then Ignite Funding does not have the capital to fund the loan, which in turn causes the close date to be postponed. If you are going to commit to participate in financing a loan, then it is important that you ensure that you will be able to execute your paperwork and send in your funds without extensive delays.
Overall, it is important to recognize that a delay in funding a loan is a frustrating process for all parties involved. As you can see, delays often occur with our client’s best interest in mind. This may seem counterintuitive because with the delay comes interest downtime that continues to extend in the process. However, taking the extra time and steps in the beginning can help mitigate the risk of something much less pleasant, such as interest down-time caused by defaulted loan.
