Assets and Reserve Requirements
When applying for a mortgage, a broker or bank will likely ask you about your assets, and more specifically your liquid assets. They’ll want to know what you’ve tucked away in order to provide a down payment, pay closing costs, and show future reserves for a potential mortgage.
Unless you are using a documentation type that doesn’t require the verification of assets, it’s very important to make sure you’ve got assets in your personal accounts. Not only that, but those assets will be need to be seasoned for at least two months. Many potential homeowners make mistakes when handling their assets prior to a mortgage transaction.
Mortgage applicants often feel 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 lenders because the money isn’t seasoned. Banks and lenders want to see that the money is in the potential homeowners account, and has 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. They ask that it be seasoned so the borrower doesn’t just borrow money from a friend to falsely improve their overall financial standing for the sake of securing a lower mortgage rate.
If you get a rate sheet, or talk to a bank or mortgage broker, they’ll usually tell you how many reserves you’ll need to verify assets and qualify for the loan. Assets will be defined in terms of PITI payments, or Principal Interest Taxes and Insurance. PITI is the monthly mortgage payment including principal and equity, including taxes and insurance.
Reserve requirements will vary from bank to bank, and mortgage program to mortgage program, but you can get a good idea of what you may need to provide for the different property types.
Owner-occupied residences 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 asset reserves:
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.
You may use retirement accounts, but they only take 70% of the total, so make sure you’ll 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.
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.
