Understanding Loan Proceeds: What You Need to Know

When you apply for a loan, it's important to note that you may not receive the entire loan amount upfront. Loan proceeds refer to the funds disbursed from a loan, net of closing costs. This article will provide a comprehensive understanding of loan proceeds, their significance in various scenarios, and how they are calculated.

What Are Loan Proceeds?

Loan proceeds encompass the amount of money you receive from a loan after deducting closing costs. Although we will primarily focus on commercial real estate loans in this article, the concept of loan proceeds applies to different types of loans. It's crucial to be aware of any limitations on the usage of loan proceeds, which will be outlined in the loan contract. For example, student loan proceeds may only be used for purchasing textbooks and not for extracurricular activities.

Factors Affecting Loan Proceeds

Several fees and expenses are associated with loans, which borrowers should be mindful of. These include:

1. Origination Fee: Lenders charge an origination fee for processing or originating the loan. Typically ranging from 0.5% to 5% of the loan amount, this fee is negotiable but may result in higher interest rates for the borrower.

2. Underwriting Fee: Lenders assess borrowers' creditworthiness through an underwriting fee, ensuring their ability to repay the loan.

3. Broker Fee: The broker or agent charges a fee for their services in securing the loan, usually calculated as a percentage of the loan amount.

4. Taxes: Taxes are applicable to loans obtained for properties.

5. Property and Title Insurance: Borrowers may need to pay for insurance to protect their rights to the property and safeguard against damages. These insurances benefit both the lender and the borrower.

Being familiar with the loan terms and conditions will help borrowers understand the actual loan amount they are eligible to receive.

Mortgage Loan Proceeds

When applying for a mortgage loan, the processing time can vary from a month to two months. After the pre-processing phase is complete, the mortgage loan proceeds are disbursed to the borrower from the mortgagor's cash escrow. The borrower then owes this amount to the lender, forming the principal balance of the loan.

Understanding Proceeds in Finance

Proceeds refer to the amount of money left after a sale or transaction. It represents the revenue generated from a successful contract. Gross proceeds are the amount before any deductions, including production costs, fees, and marketing expenses. Net proceeds, on the other hand, are the amount received by the seller after subtracting all costs associated with the transaction.

In the context of loans, loan proceeds represent the net amount available to the borrower after deducting the overhead costs from the total loan amount.

Loan Proceeds in Accounting

In accounting, loan proceeds play a crucial role in bookkeeping, helping businesses track their financial transactions. Calculating loan proceeds involves several steps:

1. Determine the loan amount and interest rate.

2. Calculate the expenses associated with providing the loan, such as underwriting and origination fees (usually a percentage of the loan).

3. Calculate the loan amount payable in these costs.

4. Subtract the costs from the approved loan amount to calculate the loan proceeds.

Example of Loan Proceeds

Let's consider an example to better illustrate loan proceeds. Suppose Person A is approved for a personal loan of $50,000. The lender charges a 4% fee, including origination and underwriting fees. Therefore, the loan payable in costs is $2,000 ($50,000 * 4%). The loan proceeds, in this case, would be $48,000 ($50,000 - $2,000).

Frequently Asked Questions

1. What is a check for loan proceeds? A check for loan proceeds is issued by the bank or lender to the borrower. It should meet the requirements for a cashier's check or teller's check under the Uniform Commercial Code (UCC).

2. How do I record loan proceeds that I haven't received yet? After the loan closure, debit an asset and credit the debt, such as notes payable. The credit should cover the entire borrowed amount, not just the proceeds. Until the disbursement, record the proceeds as an asset titled "loan proceeds receivable." Once received, debit the cash account and credit the receivables account.

3. Are loan proceeds taxable in the case of a trust? Loan proceeds are often exempt from income tax as they are not considered earnings. However, if the loan payment is treated as income, the trust should treat it as such and pay taxes accordingly.

4. What is the best way for a lender to approve using funds from a high-risk loan? In most cases, repaying an existing loan is the most prudent use of loan proceeds. The best use depends on the loan type, such as using funds for commercial real estate construction or acquisition.

Summary

Loan proceeds represent the net amount of a loan payable to the borrower. These funds may be made directly available or held in escrow and disbursed periodically. It's crucial for borrowers to carefully review the loan terms to understand the actual amount they will receive. By comprehending loan proceeds, borrowers can make informed financial decisions and navigate the borrowing process more effectively.