When applying for a mortgage, a mortgage broker or bank will likely inquire about your assets, and more specifically, your liquid assets. They’ll want to know what you’ve squirreled away in order to provide a down payment, pay closing costs, and make monthly mortgage payments going forward.
So unless you’re relying on a documentation type that doesn’t require the verification of assets, it’s very important to make sure you’ve got plenty of assets in your personal accounts. Not only that, but those assets will be need to be seasoned for at least two months in most cases.
Many prospective homeowners make mistakes when handling their assets prior to a mortgage transaction, thinking they can shuffle some assets from a friend or family’s account into their own without incident. Unfortunately, this doesn’t fly with many banks and mortgage lenders because the money isn’t sourced or seasoned. Banks and lenders will want to ensure the money is in the borrower’s account, and that it’s been there for several months before they’ll accept those assets.
They do so to verify that the borrower has established a savings pattern, and that the assets support the stated income (if applicable). They ask that it be seasoned so the borrower doesn’t just borrow money to falsely inflate their overall financial position for the sake of securing a lower mortgage rate.
Asset Reserves
If you get your hands on a rate sheet, or talk to a bank or mortgage broker, they’ll usually tell you how many months of reserves you’ll need to verify assets and qualify for a mortgage. Asset requirements will be defined in terms of PITI (Principal Interest Taxes and Insurance), meaning you’ll need enough money to pay for “X” amount of months of mortgage payments including principal, interest, taxes and insurance. And mortgage insurance, where applicable.
Reserve requirements will vary from bank to bank, and from mortgage program to mortgage program, but you can get a good idea of what you may need to provide for different property types.
- Owner-occupied residences typically require two months PITI in reserves, but may ask for up to six months.
- For second homes, reserves can range between three to four months, but again, can be higher.
- On non-owner occupied properties, otherwise known as investment properties, reserves are usually six months PITI or more.
Allowable types of assets:
Earnest Money Deposit
VOD
Checking/Savings accounts
Business accounts
Stocks
Bonds
IRA/401k and other retirement accounts
Gift Funds/Gift of Equity
Sale of Assets
Seller contributions
Some useful tips regarding using assets for a mortgage:
- Move money into a savings account the minute you start looking for a property. This will allow those funds to be seasoned, and thus won’t require sourcing.
- Get a VOD, or Verification of Deposit from your local bank that provides the overall balance of your account, and your average balance based on two months. This is better than providing bank statements, which may show payroll and other information that you may not want to disclose. Even if the mortgage company initially asks for bank statements, a VOD should suffice.
- You may also use retirement accounts, but lenders typically only consider 70% of the total, so factor that in to ensure you have enough to cover reserves. *This can vary based on your lender’s guidelines.
- If you plan on using business accounts for assets, you’ll likely need to be the 100% owner. Although if you own only 50%, some lenders will accept a CPA letter stating what percentage the borrower has access to, and that the use of those funds won’t affect the business negatively.
- If you sell personal assets, make sure you save receipts to prove the source of funds. Acceptable items usually include automobiles, coins, art, and antiques.
Tip: Make sure assets are in personal accounts and seasoned long before applying for a mortgage!
