After applying for a loan, you may not receive the entire amount immediately and may receive a little less than the amount you applied for.
Understanding the workings of loan proceeds may help you make better financial decisions.
What Are Loan Proceeds?
Loan proceeds refer to the funds disbursed from a loan, net of closing costs. Although this article focuses on commercial real estate (“CRE”) loans, the concerns regarding loan proceeds apply to various types of loans.
Some of the standard fees and expenditures of a loan that the borrower should keep an eye on include:
- Origination Fee: The origination fee is what lenders charge borrowers for processing or originating a loan. It can be between 0.5% to 5% of the loan amount. The origination fee is negotiable, though it may result in higher interest rates for the borrower.
- Underwriting Fee: The underwriting fee is the fee the lender charges to assess the borrower’s creditworthiness. This is to make sure that the borrower will be able to pay off the loan that they receive.
- Broker Fee: This is the fee that the broker or the agent charges for his services in securing the loan for the borrower. It is a percentage of the amount of the loan.
- Taxes: Taxes are primarily payable in cases of loans obtained for a property.
- Property and Title Insurance: These are insurances payable by the borrower to ensure that they have the right to the title deed and claims to damages to the property. They protect both the lender and the borrower.
Borrowers should read in detail the terms and conditions of the loan so that they are aware of the actual loan amount they will be eligible for. Loan proceeds can have certain limitations on how they may be used, which will be outlined in the contract. For instance, the loan proceeds from a student loan may only be used to buy textbooks and not pay for extra-curricular activities.
What Are Mortgage Loan Proceeds?
A mortgage loan application can take a month to two months to process. After the pre-processing is complete, the amount dispatched to the borrower forms the mortgage loan proceeds available for the homeowners’ use. It is disbursed from the mortgagor’s cash escrow. The loan is then owed by the borrower to the lender and forms the principal balance of the loan.
What Does Deposit Loan Proceeds Mean?
What Are Proceeds In Finance?
Proceeds refer to all the costs that are available after a sale or transaction. It is a form of revenue generated after a successful contract. If a number of units are sold, the total proceeds are the number of units sold multiplied by the price of one unit. Proceeds can be categorized as gross proceeds or net proceeds, such loans in Miami are easier to get.
Gross proceeds are the proceeds available to the seller before any deductions. It is the price decided for the transaction. Gross proceeds include the price of production, such as material costs, labor costs, and machinery costs, and the costs involved with selling the product, such as mediators fees, the cost of making the contract, and possibly even marketing and advertising costs. Gross proceeds are thus the total cost of the product.
Net proceeds are the proceeds that the seller receives after subtracting all the underlying costs associated with the transaction. For instance, if you sell your house for $500,000 and your real estate agent charges a commission of 5%, the net proceeds available to you will be $475,000. This is the money you will receive from selling the house. In some instances, taxes and costs of processing the contract are also subtracted from the gross proceeds to get the net proceeds.
In the case of a loan, proceeds refer to the net amount available to the borrower after the lender has subtracted the overhead costs of the loan from the total loan amount.
Loan Proceeds Meaning Accounting
In accounting, loan proceeds are essential in bookkeeping. Bookkeeping is the recording of financial transactions as part of business dealings. It helps show where a business is doing well and what areas need improvement. To calculate the loan proceeds, the accounting department will carry out a calculation that goes something like this:
Step 1: Note how much loan is being given and at what rate
Step 2: Calculate the expenses you incurred to give the loan. For instance, the underlying costs like underwriting, origination fees, etc. These costs are usually a percentage of the loan
Step 3: Calculate how much the loan is payable in these costs
Step 4: Subtract the costs from the loan approved to get the loan proceeds.
An example of loan proceeds in accounting is covered in the following section.
Loan Proceeds Example
Loan proceeds are applicable in several different instances.
For instance, you apply for a mortgage loan of $100,000. Your lender may charge a 2% origination fee and 1% in underwriting. The borrower will receive $97,000. They will have to pay back the amount in loan proceeds plus the interest rates.
Similarly, a borrower may apply for $20,000 in student loans. After the loan processing is complete, the borrower may receive only a total of $18,000 – the net proceeds available after all the overhead charges are paid off.
Calculating loan proceeds can follow the example below:
1: A personal loan of $50,000 is approved for Person A
2: The lender has the following costs associated with the loan
- Origination fee 1%
- Underwriting fee 1%
- Broker fee 2%
- Total fees = 4%
3: Amount of loan payable in costs :
4% of $50,000 = $2,000
4: Amount of loan payable in loan proceeds :
$50,000 – $2,000 = $48,000
What is a check for loan proceeds?
This is a check that the borrower receives from the bank or another lender for the loan proceeds. It should be noted that the check meets the requirements for a cashier’s check or teller’s check under the Uniform Commercial Code (UCC). Hence, it is subject to all UCC requirements pertaining to these kinds of checks.
How do I record loan proceeds that I haven’t yet received?
Following closure, an asset is debited, and a debt, such as notes payable, is credited. The credit covers explicitly the entire amount borrowed, not simply the proceeds. The discrepancy between the loan balance and revenues is recorded as one or more expenditures. Carry the proceeds as an asset titled “loan proceeds receivable” until you get them. Then, after receiving the disbursement, debit the cash account and credit the receivables account.
Are loan proceeds taxable in the case of a trust?
Loan proceeds are often exempt from income tax because they are not considered earnings. That would apply to a trust that is given loan proceeds. Nonetheless, the trust should treat the money as income if it is a payment for a loan. The phony loan would be taxed if the trust wasn’t excluded from paying taxes.
What is the best way for the lender to approve using the funds from a high-risk loan?
In most cases, repaying an existing loan first is the most innovative use of proceeds. Using the funds for a particular purpose is then the best usage. Naturally, the type of loan determines how it will be used. For instance, it can be to pay for CRE construction or acquisition.
Loan proceeds are the net amount of a loan payable to the borrower. They may be made directly available for the borrower or sent to a third party to be kept in escrow and disbursed at regular intervals. Borrowers should review the terms and conditions of the loan to understand better how much loan they will actually receive.