When you apply for a mortgage lenders will evaluate four main areas: your income (or ability to repay), credit (or willingness to repay), collateral (appraised value of the home) and assets (cash involved in the transaction and cash reserves after closing). Assets are often the least discussed aspect, but the most important in many cases.
An important step in getting approved for a mortgage is the verification of sources for your down payment and closing costs, as well as your other assets. It will not be enough to simply "come up" with the money, as lenders want to verify where the money came from. If it is possible to document the funds came from your savings, the lender will have greater confidence in your strength as a borrower and your creditworthiness.
Along with the funds used for the down payment, it is also important to document any other assets, or "reserves," you have. These assets can be used during times of financial difficulty, such as unemployment or illness, and they may be used to demonstrate that you are dependable.
What Are Considered Assets?
- Cash used for the down payment.
- Cash necessary for closing costs.
- Cash necessary for prepaids, like homeowners insurance and taxes, and the establishment of an escrow account for future payment of these items.
- Cash reserves, or the money left after closing.
Assets that may be considered in a mortgage application include retirement accounts, stocks, bonds and mutual funds, life insurance, an estimated value of personal property like a car or boat and other real estate.
Many of these assets can be used to help a home buyer with limited income but substantial assets qualify for a conventional mortgage.
What Do Lenders Require on a Mortgage Application
When a lender examines your mortgage application, they want to be sure you have the money to cover the monthly mortgage payment without assistance. They also want to see financial stability. When you want to apply for a mortgage, you will also need to plan ahead with your finances, because lenders also want assets to be "seasoned."
This means significant assets and deposits must have been in your bank account for at least one month and the lender must be able to see where they have come from and why.
Assets are important because they are a true reflection of your financial strength, and your ability to save and budget your money can be a good indicator of your future payment habits.
How to Document Assets
Complete documentation of the paper trail for funds used for closing costs and a down payment is especially important. The easiest way to document funds in a bank account (including a checking account or money market account) is with copies of the most recent bank statements. If the cash has been in the bank account for the entire period covered by the statements, you will be fine because the assets are "seasoned." If the statements show a large or strange deposit, you will be asked to document the source.
If you use gift money for your down payment, your lender will often require the donor sign a "gift letter." This letter states the relationship between the parties involved, the address of the property to be purchased, the amount of the gift and sometimes even the source of the money. The letter must also state the money is a gift and does not require repayment.
Common Asset Problems
There are several asset-related problems that may come up during underwriting:
- A large deposit that is excessive for the borrower's income level will raise questions. Where is the money coming from? The underwriter will wonder if the borrower got a loan that isn't appearing yet on the credit report.
- Cash deposits are a red flag, because most people do not keep money in cash but in a bank. The lender will want to know where the money came from.
- Gift money or seller's concessions, while considered an asset, will raise concern about the borrower's ability to repay.