Lender due diligence and underwriting: the complete checklist

What is lender due diligence?

Lender due diligence is the process of verifying the facts behind a loan before you fund it: who the borrower is, what the property is worth, whether title is clean and how the loan will be repaid. For a private lender making first-lien, business-purpose real estate loans, it means collecting and checking documents rather than relying on what the borrower or broker says.

The checklist above is organized the way most loan files are: borrower and guarantor, entity, property, title, valuation, budget, exit, closing and, for income property, the commercial items. Each line is something you can verify with a document or a third party. If you can’t verify it, treat it as unknown, not as fine.

Two checks catch people out. First, confirm the loan really is for a business purpose: a loan to an investor’s LLC for a rental or a flip is very different, legally, from a loan on someone’s own home. Our guide to business-purpose vs consumer loans explains why, and you should confirm the rules in your states with counsel. Second, screen every borrower, owner and guarantor against the OFAC sanctions lists before closing.

What does underwriting check that due diligence doesn’t?

Due diligence establishes the facts; underwriting judges them. Due diligence confirms the appraisal says $600,000, the borrower has $90,000 in the bank and title shows two prior liens. Underwriting asks whether that value is believable, whether that liquidity is enough for this project, and whether the loan amount, leverage and terms make sense given everything in the file.

In practice the two run together. When you underwrite a hard money or bridge loan, you are mostly testing four things:

1. The collateral. Is the value supported, and is the loan-to-value (and, for rehab or construction, loan-to-cost) within your limits? See LTV vs LTC vs ARV and how to read an appraisal as a lender.
2. The borrower. Can this sponsor execute this plan? A verified track record and real liquidity count for more than a credit score alone.
3. The plan and budget. Is the scope realistic, and will draws be released only against work completed? See construction draw management.
4. The exit. Will a sale or refinance repay the loan on time, with room to spare? See bridge loan exit strategies.

Hypothetical example: a borrower asks for $420,000 to buy and renovate a house appraised at $450,000 as-is with an ARV of $700,000. Due diligence confirms the appraisal, the budget, the borrower’s funds and clear title. Underwriting then asks whether the comps behind the $700,000 ARV hold up, whether the budget covers the scope, and whether the loan still works if the sale takes longer or brings less than planned.

How to underwrite a private real estate loan, step by step

Underwriting a private real estate loan means sizing the loan to the collateral and the plan, testing the borrower and the exit, pricing the risk, and writing down the conditions that must be met before funding. Done the same way on every loan, it makes your decisions consistent and your files easy for a capital partner to follow.

1. Size the loan. Compare the request with your limits on loan-to-value, loan-to-cost and, for rehab or construction, after-repair value. Use the lower of purchase price or appraised value where your policy says so.
2. Test the borrower. Verify experience on similar projects, liquidity for the down payment, reserves and overruns, and credit. Decide whether a personal guarantee is required.
3. Test the plan. Check the scope and line-item budget against the appraisal and the timeline; set the draw schedule and inspections.
4. Test the exit. For a flip, check resale comparables and time to sell; for a refinance, check that the stabilized property can support the takeout loan (for rentals, the debt service coverage ratio).
5. Price it. Set the note rate, points, interest reserve, extension and prepayment terms to fit the risk and your cost of capital. With Lender Capital, price the note above the capital partner’s agreed rate: you keep your points (less the placement fee) and earn the difference as a yield spread.
6. Write the conditions. List what must be satisfied before closing: title clearances, insurance, entity documents, verification of funds, and any appraisal or budget items still open.
7. Document the decision. A one- or two-page credit memo with the sizing math, exceptions and mitigants is what a capital partner reads first.

Loan file due diligence: what capital partners look for

Capital partners fund files, not stories. When a lender brings a loan to an outside capital source, that source repeats much of the lender’s diligence, so the quality of the file decides whether, and how quickly, the loan can be reviewed. What they look for is consistent: the underlying documents rather than summaries, numbers that agree across the term sheet, appraisal and budget, a title commitment showing how the loan will be a first lien, entity documents that authorize the borrower to sign, and a clear exit.

Our guide to the complete private loan file lists the documents in order. With Lender Capital, lenders submit first-lien, business-purpose loans with the full file before closing, each loan is sent only to capital partners whose criteria it fits, and the capital partner reviews the full file before committing. A complete file is also what lets one capital partner fund the whole loan at closing, an alternative to carrying loans on a warehouse line.

Commercial real estate lender due diligence checklist (CRE)

Commercial real estate lender due diligence adds a layer: because the loan is repaid from the property’s income, you check the income as carefully as the value. A commercial real estate lender due diligence checklist usually starts with the rent roll and the trailing twelve months (T-12) of operating statements, then tests them against the leases themselves.

• Income: a certified rent roll, the T-12 and prior years, and every lease with its amendments. Calculate DSCR (net operating income divided by debt service) and debt yield (net operating income divided by the loan amount) from verified figures, not pro forma.
• Tenants: estoppel certificates confirm what tenants actually owe and whether there are defaults or side agreements; SNDAs set out how major tenants and your lien relate if you foreclose. Check tenant concentration: income that depends on one tenant is riskier than income spread across many.
• Environmental: a Phase I Environmental Site Assessment. The EPA recognizes ASTM E1527-21 as consistent with its All Appropriate Inquiries rule.
• Physical and legal: a property condition report for deferred maintenance and capital needs, a zoning report confirming the use is permitted, and usually a survey for the title policy.

How long does lender due diligence take?

It depends on the loan and on how quickly third parties deliver. The timeline is usually set by the slowest outside report: the appraisal, the title commitment, and for commercial property the Phase I, zoning and condition reports and tenant estoppels. A residential bridge loan with a responsive borrower moves faster than a multi-tenant commercial property. The best way to shorten it is to order third-party reports as soon as the term sheet is signed and to collect entity and borrower documents in one request rather than piecemeal.

Common red flags

• Changed wire instructions, especially by email. Verify every wire by phone using a number you already have; the FBI’s IC3 and ALTA both warn about payment-redirection fraud. More in escrow and closing for privately funded loans.
• A seller or borrower who won’t meet or be verified, particularly on vacant land or free-and-clear property, a pattern of seller impersonation fraud.
• Vesting that doesn’t match the borrower, recent transfers at very different prices, or unexplained liens. See title insurance and title commitments for lenders.
• An appraisal ordered by the borrower, comps that are old, distant or dissimilar, or a broker price opinion offered in place of an appraisal.
• A budget without line items, no contingency, or a contractor without a license or insurance.
• Signs the property is the borrower’s own home, which can turn a business-purpose loan into a consumer loan.
• A vague exit, or a refinance plan that only works if rates fall or rents rise.

None of these automatically kills a loan, but each needs an answer in the file before you fund. This page is general information, not legal advice; consult counsel on the rules that apply in your states.

Frequently asked questions

What is lender due diligence and underwriting?

Lender due diligence and underwriting is the review a private lender completes before funding. Due diligence verifies the facts about the borrower, entity, property, title, value and budget; underwriting decides whether those facts support the loan amount, leverage, pricing and exit, and records the conditions for closing.

What is on a lender due diligence checklist?

A lender due diligence checklist covers the borrower and guarantor (ID, OFAC screening, credit, experience, liquidity), the entity documents, the property, title, valuation, the rehab or construction budget, the exit and terms, and the closing. Income-producing commercial property adds rent roll, T-12, leases, estoppels, DSCR and a Phase I ESA.

What is loan file due diligence?

Loan file due diligence is the review of a closed or pending loan’s documents to confirm the loan is what it claims to be: valid borrower and entity, supported value, first-lien title, enforceable documents and a credible exit. Capital partners and loan buyers do it before funding or buying a loan.

What due diligence do lenders do on commercial real estate?

For commercial real estate, lenders verify the income as well as the value: a certified rent roll, T-12 operating statements, leases and tenant estoppels, SNDAs for major tenants, DSCR and debt yield, a Phase I Environmental Site Assessment, a zoning report, a property condition report and a survey for title.

How do you underwrite a hard money loan?

Underwrite a hard money loan by testing four things: the collateral (as-is value, ARV, LTV and LTC), the borrower (track record, liquidity, credit and background), the plan (scope, budget, contractor and draws) and the exit (sale or refinance). Each must be supported by documents, not just the borrower’s word.

What documents does a private lender need?

Typically a loan application, borrower and guarantor ID, credit and background reports, bank statements, entity formation documents, good standing, operating agreement and resolution, purchase contract, appraisal, title commitment, insurance, budget and scope for rehab loans, a signed term sheet, and the loan documents prepared by counsel.

What is the difference between due diligence and underwriting?

Due diligence collects and verifies the facts of a loan: documents, reports and third-party confirmations. Underwriting uses those facts to decide whether to make the loan, how much to lend and on what terms. Good underwriting depends on complete due diligence.