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What are Loan Documents?
Loan documents are documents provided and requested by lenders for the purpose of providing a loan. They are typically statements of personal and financial information of the borrower to approve a loan. These documents are used by the lenders to evaluate whether or not they will provide you with a loan.
Loan documents are necessary to initiate a loan approval process by a lender. Some documents that may be required are tax returns, bank statements, pay stubs, W2, and a proof of income.
Types of Loan Documents
There are four types of loan documents:
- Loan Estimate : An initial loan estimate outlines the terms and costs of the loan. It is the first part of the paperwork provided by the lender.
- Rate Lock Form : A rate lock form, once signed, makes the loan estimate binding. It establishes a rate for a specified period of time.
- Borrower’s Information : The lender will request paperwork from the borrower for the purpose of evaluating the risk in lending money to the borrower.
- Closing Disclosure : A set of disclosures or closing disclosure is the final part of the lending process. This includes any riders or terms that apply to the loan.
Individual terms and forms within these three documents could include borrower information, borrower affidavit, financial documents, escrow related documents, etc. depending on the type and purpose of the loan.
Here is an article about specific types of loan documents.
Essential Terms in Loan Documents
There are some essential terms in loan documents that you should look out for. Here are ten provisions every loan agreement should have:
- Identity of parties : Names of lenders and borrowers should be stated along with address and other information about the parties.
- Date of agreement : Like most legally binding contracts, a loan agreement should also mark the date of initiation along with signatures by all parties.
- Amount of loan : Loan documents should include the exact amount of loan.
- Interest rate : Interest rate on the amount loaned should be mentioned in the document.
- Repayment terms : Loan agreements should always discuss ways in which the loan can be repaid along with any associated conditions with the repayment, such as timeline and deadlines. Often repayment is of three different kinds: payment on demand, payment at the end of the loan term and payments in installments.
- Default provisions : The loan agreement should define what constitutes as default and remedies in case of default. Default occurs when the borrower fails to meet repayment requirements.
- Signatures: The loan agreement will always have signatures of both parties, making the contract legally binding.
- Choice of law : The choice of law clause outlines the state whose laws will be applied in interpreting the agreement.
- Severability: This clause allows for the agreement to still be enforceable and continue even if some parts of it are declared unenforceable.
- Entire Agreement : The entire agreement clause precludes any party from claiming that there are other agreements in addition to the ones stated in the loan agreement.
Here is an article about loan terms and types of loans.
Required Loan Documents
Lenders require loan documents from borrowers as proof of financial and personal history. These are some of the common loan documents that you might see depending on your loan type:
- Tax returns : In cases of sole proprietorship or partnership, you will need to provide personal tax returns. In case of LLC or corporation, you will provide your business tax returns.
- Bank Statements : Bank statements should have the name of business or the business name should appear in bank records. These could be in the form of business fees or any business-related fees.
- Proof of business : In order for lenders to understand business structure and legitimacy, you will need to provide business registration documents.
- Business permits/license : Business licenses and permits help you establish ownership of your business. Lenders can use this to ensure they are lending to the right person.
- Employer identification number (EIN): Employer identification number (EIN) is assigned by the IRS and can be required by lenders. Sole proprietorships would need a EIN if they hire any employees. Sometimes this number would be required as part of your loan application.
- Business financial documents : These can include profit-loss statement, balance sheet, cash flow statement, etc. These detail a company’s performance and would be required by the lender.
- Loan history : Lender would require information regarding your other loans to assess your debt level and ability to repay the loan.
- Proof of collateral : Sometimes lender would require a collateral and the proof of collateral before lending any money. The collateral is generally an asset of sufficient value to offset the loan amount.
- Business plan : Sometimes lenders can ask for business plans to document and detail business goals and predictions. The plan can include product details, customer analysis, supply chain, industry analysis, finances and cash flow.
- Account details : Lenders can require accounts receivable aging and accounts payable aging reports. These two reports provide information about how you manage your working capital. Accounts receivable aging document is usually required for a firm that operates in the business-to-business (B2B) segment. If your B2B company provides goods/services on credit terms, it will show up on your accounts receivable aging report. An accounts payable aging report informs the lender about the number of days of credit received from suppliers.
Here is an article about business loans.
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- Loan Application : A loan application will be required by your lender to initiate the lending process. It will ask for your personal information and loan amount required.
- Proof of Identity: You will need your identity proof to initiate any loan borrowing process. These can include driver’s license, passport, state-issued ID, certificate of citizenship, birth certificate, military ID, etc.
- Pay Stubs/W2/Employer/Income Verification : While there is no collateral backing a personal loan, lenders often require proof of employment to assess risk in lending. These could include pay stubs, employer’s contact information, income tax returns, bank statements, etc. Apart from these you will also need to provide your credit history and ensure that the desired loan amount is reasonable based on your credit history.
- Address proof: Proof of living situation can help lenders assess risk in lending as well. These could include utility bill, lease terms, proof of insurance, etc.
Here is an article on personal loans.
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I focus my practice on startups and small to mid-size businesses, because they have unique needs that mid-size and large law firms aren't well-equipped to service. In addition to practicing law, I have started and run other businesses, and have an MBA in marketing from Indiana University. I combine my business experience with my legal expertise, to provide practical advice to my clients. I am licensed in Ohio and California, and I leverage the latest in technology to provide top quality legal services to a nationwide client-base. This enables me to serve my clients in a cost-effective manner that doesn't skimp on personal service.
I am a 1984 graduate of the Benjamin N Cardozo School of Law (Yeshiva University) and have been licensed in New Jersey for over 35 years. I have extensive experience in negotiating real estate, business contracts, and loan agreements. Depending on your needs I can work remotely or face-to-face. I offer prompt and courteous service and can tailor a contract and process to meet your needs.
Tim advises small businesses, entrepreneurs, and start-ups on a wide range of legal matters. He has experience with company formation and restructuring, capital and equity planning, tax planning and tax controversy, contract drafting, and employment law issues. His clients range from side gig sole proprietors to companies recognized by Inc. magazine.
For over thirty (30) years, Mr. Langley has developed a diverse general business and commercial litigation practice advising clients on day-to-day business and legal matters, as well as handling lawsuits and arbitrations across Texas and in various other states across the country. Mr. Langley has handled commercial matters including employment law, commercial collections, real estate matters, energy litigation, construction, general litigation, arbitrations, defamation actions, misappropriation of trade secrets, usury, consumer credit, commercial credit, lender liability, accounting malpractice, legal malpractice, and appellate practice in state and federal courts. (Online bio at www.curtmlangley.com).
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Braden Perry is a corporate governance, regulatory and government investigations attorney with Kennyhertz Perry, LLC. Mr. Perry has the unique tripartite experience of a white-collar criminal defense and government compliance, investigations, and litigation attorney at a national law firm; a senior enforcement attorney at a federal regulatory agency; and the Chief Compliance Officer/Chief Regulatory Attorney of a global financial institution. Mr. Perry has extensive experience advising clients in federal inquiries and investigations, particularly in enforcement matters involving technological issues. He couples his technical knowledge and experience defending clients in front of federal agencies with a broad-based understanding of compliance from an institutional and regulatory perspective.