How to read a loan due diligence pack

A loan due diligence pack is the lender’s file on one specific loan: the property, the borrower, the terms and the risks. To read one well, start with the numbers, then test the exit strategy, then check the valuation, the title and the borrower. For every section, ask the same question: if this went wrong, what protects my capital?

HomeSec Business Finance, an Australian private lender founded in 2004, prepares a pack for every loan it offers to co-funders, after assessing the loan against its 50-point due diligence checklist. Each pack covers the loan, the property and the borrower, the rate and the risks. This guide is broader than any one lender’s format. It describes what a good pack should show you, and the questions worth asking of each part, whoever the lender is.

What is a loan due diligence pack, and why read it yourself?

In a pooled fund, you never see this document. The manager reads it, decides, and reports to you later in averages. ASIC’s 2025 surveillance of private credit funds found that most funds reviewed did not effectively separate the people approving loans from those monitoring their value, and in September 2026 it reported that only four of 28 funds published the rates charged to borrowers.

In direct mortgage investing, the pack is the starting point for your decision. The lender has already done the credit work. Your reading is a second, independent look, and you are free to say no. The overall process is set out in how it works.

Where should you start?

Start with five numbers. Together they tell you in a couple of minutes whether the loan is worth a closer read.

If those look right, read the exit strategy next. Then work through the rest of the pack in order.

1. Property and valuation: what is the security really worth?

A good pack describes the property plainly: its address, type, size, condition and use, and why it would sell readily if it ever had to. It includes a valuation.

Questions to ask of the valuation:

• Who instructed the valuer? A valuation commissioned by the lender from an independent valuer carries more weight than one supplied by the borrower.
• How recent is it? Markets move. A valuation from last year says less about today’s value than one from last month.
• On what basis? You want the current market value of the property as it stands, not an “as if complete” or “on completion” figure.
• Is it supported? Look for comparable sales nearby and a clear explanation of any adjustments.

Then ask about saleability. A standard home in an established suburb has a deep pool of buyers. A highly specialised or unusual property may take much longer to sell, which matters if the loan ever has to be recovered.

2. Title, existing debt and ranking: who is ahead of you?

The title search shows who owns the property and what is already registered on it. A good pack confirms the registered owner is the borrower or a guarantor, and lists every existing mortgage, caveat and significant easement or covenant.

Ranking decides the order of repayment if the property is sold. If your loan is a second mortgage, the pack should show the first mortgage: who holds it, how much is owed and whether it is up to date. Ask whether the amount that can rank ahead of you is capped, for example by a priority agreement between the lenders. Our comparison of first vs second mortgage investments explains why this matters.

Finally, confirm the form of your security. A registered mortgage is stronger than a caveat, and a good pack says clearly which applies.

3. LVR: how big is the equity buffer?

The LVR is the loan, plus all debt ranking ahead, divided by the property’s value. A good pack shows the calculation, not just the result.

Check that every prior-ranking dollar is included. Then think about the buffer as a lender would. If the loan defaulted, the equity above the debt would need to absorb any fall in value, sale costs and the interest that accrues during a sale. HomeSec’s ceiling is 80% on residential property, counting all debt ranking ahead, and lower on commercial. Our explainer on LVR for mortgage investors works through a stress test.

4. Purpose: why does the borrower need the money now?

A good pack explains the purpose in a sentence or two. For short term business loans, it is usually something concrete: settling a purchase, funding a business opportunity, bridging a gap until a sale settles or a bank loan is approved.

Ask whether the purpose makes commercial sense and whether it fits the exit. A loan to settle a property purchase that will be refinanced by a bank once approved hangs together. A loan whose purpose is vague, or which seems to be repaying other overdue debts with no change in circumstances, deserves more questions.

5. Exit strategy: how will the loan be repaid?

This is the most important section in the pack. The exit is how the borrower repays the loan at maturity. A credible exit keeps a loan out of default. The equity buffer only protects you if the exit fails.

Common exits are a sale of a property, a refinance with a bank or other lender, or proceeds from the business. What separates a good exit from a hopeful one is evidence:

• A signed sale contract, or a sale campaign already under way.
• A bank’s approval, or a clear account of where a refinance application stands.
• Confirmed business receipts, with timing that fits the term.

Ask two follow-up questions. Is the timing realistic within the 1 to 12 month term? And what is the fallback if the planned exit is delayed? A good pack answers the second question honestly, including the option of selling the security.

6. Borrower and business: who are you lending to?

A good pack tells you who the borrower is and what their business does. It covers the entity and its directors, any guarantors, how long the business has been trading, and the borrower’s position more broadly.

Useful checks include company and director searches, credit history, and searches for court actions or insolvency. Ask whether anything in the borrower’s history explains why they are using a short term lender rather than a bank. Often the answer is simply speed: established businesses pay for a loan that settles in days rather than months. That is a normal reason. Unexplained defaults or litigation are not.

7. Term and rate: are you paid fairly for the risk?

The pack sets out the loan amount, your contribution, the term and the rate you will earn. With HomeSec, returns are 12% to 18% p.a. on the loans you choose, set loan by loan.

Ask whether the rate fits the risk. A second-ranking position is generally priced higher than a first on the same property. A shorter term means your capital comes back sooner. Compare the rate across the packs you see over time; you will quickly get a feel for how position, LVR and property type are priced.

8. Security documents: what will you actually hold?

The last section describes the legal documents. A good pack tells you whether your security is a registered mortgage or a caveat, whether there are guarantees, and whose name the loan agreement will be in.

With HomeSec, the loan agreement is prepared in your name, the borrower signs with their own solicitor present, and you are named on the registered mortgage (or caveat, where that is the security) for your exact contribution, alongside HomeSec. Ask how enforcement would work if the borrower defaulted; our walkthrough of what happens if a borrower defaults covers each step.

What red flags should make you pause?

• A valuation that is old, borrower-supplied or based on a future value.
• Debt ranking ahead of you that is uncapped or in arrears.
• An exit with no evidence behind it, or one that relies on everything going right.
• A property that would be slow or hard to sell.
• A borrower history with unexplained defaults or court actions.
• A lender with none of its own money in the loan.

Any one of these is a reason to ask questions. Several together are a reason to pass.

How much of this work has already been done?

With HomeSec, a great deal. Every loan is assessed against the 50-point checklist before you see it. Both joint CEOs are involved in every loan decision, and General Manager Catriona Anderson signs off every credit decision. HomeSec then puts its own money into the loan it is offering you.

Your review is not a substitute for that work; it is a second look by the person whose money is at stake. If something is unclear, ask. Our Funding Manager is available seven days on 03 9017 8277. For questions to ask any manager, see questions to ask a private credit manager.

Want to read a real pack?

The best way to learn is to read one. If you’d like to see what a HomeSec loan pack looks like, register your interest and our Funding Manager will be in touch.