When applying for a mortgage, a mortgage broker or lender 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 come up with a down payment, pay closing costs, and make monthly mortgage payments going forward once you close your loan.
Along with that, you’ll want to ensure those assets are “seasoned” for at least two months (60 days) in most cases.
Season Assets Two Months Before You Apply for a Mortgage!
Many prospective homeowners and those looking to refinance make mistakes when handling their assets prior to a mortgage transaction.
They may falsely assume they can just shuffle some assets from a friend or family member’s account into their own bank account without incident, then use them to qualify for a mortgage.
Unfortunately, this doesn’t fly with many banks and mortgage lenders because the money isn’t properly sourced or seasoned.
Banks and lenders want to ensure the money is truly the borrower’s money, and in the borrower’s account for several months before they’ll accept those assets as their own. If it just appears out of thin air one day, the lender won’t feel very comfortable about the legitimacy of those funds.
For example, attempting to use mattress money for your down payment likely won’t go over well. You might think, why not!? It’s my money, my hard-earned cash, why can’t I use it?
Well, the lender doesn’t know where that money came from if it just appeared in your bank account a couple days ago. Could you have taken out an undisclosed loan, borrowed money from someone, or acquired funds another way that could make you a riskier borrower than you appear? Sure and absolutely.
This is why mortgage lenders typically want to see that any assets used in the mortgage transaction are seasoned for at least 60 days. Put simply, this means providing two months of bank statements that show the funds being present in the account for that entire duration.
Why 60 days? Well, lenders will generally ask for the two most recent bank statements, which cover a span of 60 days, give or take. So anything that occurs prior to those two months of bank statements won’t be revealed to the lender.
For example, if you plan on using a specific bank account to verify your assets, you may want to move any necessary funds into that account 60-90 days before you apply for a mortgage. That way the money will be considered seasoned and the average daily balance of the account will be reflected as well.
The two most recent bank statements won’t show those funds transfers if they were completed 60+ days earlier, in a prior statement period.
And if the funds have been in the account for 60+ days, you shouldn’t need to source them beyond the bank account they’re in.
Conversely, if you move a sum of money into a bank account less than 60 days before you apply, the lender will see that deposit on the bank statement and likely scrutinize it. And more importantly, ask for the source of those funds. If you don’t have a good answer, your loan application could be in jeopardy.
This is why seasoning assets is so important. Once they’re seasoned in a verifiable account, they are considered sourced and should be accepted without further review.
Ultimately, lenders want to verify that the borrower has established a savings pattern, and that the assets are sufficient to support the mortgage payment. Or in the case of anything less than full doc, support the stated income.
They ask that they be seasoned so the borrower doesn’t falsely inflate their financial position to obtain a lower mortgage rate, or to borrow more than they can truly afford.
Asset Reserve Requirements 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 homeowners 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. In some cases you might not need any though!
– 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.
Even if you apply for a no down payment mortgage, reserves may still be required to show the lender you’re able to make monthly payments.
Reserves Needed for Specific Types of Loans
For Fannie Mae and Freddie Mac loans (conforming), reserve requirements vary based on credit score and LTV, along with property type. They can range from as little as zero months to as much as 12 months, depending on the scenario. As a rule of thumb, more risk requires more reserves.
There is no reserve requirement for FHA loans on 1-2 unit properties. However, 3-4 unit properties typically require three months of PITI.
For USDA loans, no reserves are required, but they can be used as a compensating factor if necessary.
For VA loans, there isn’t a reserve requirement unless it’s a 3-4 unit property, at which point six months reserves are required. Additionally, three months of reserves are required for each rental property owned that is not secured by a VA loan.
For jumbo loans, reserve requirements can vary tremendously, from as little as six months to several years, depending on how large the loan is.
Allowable types of assets:
- Earnest Money Deposit
- Checking/Savings/CD/Money Market Accounts
- Business accounts
- IRA/401k and other retirement accounts
- Gift Funds/Gift of Equity
- Sale of Assets
- Seller contributions
Ineligible types of assets:
- Cash on hand
- Undocumented funds (mattress money)
- Sweat equity
- Unsecured borrower funds
- Illegally obtained funds
Some useful tips regarding using assets for a mortgage:
– Move money into a checking or savings account the minute you start looking for a property. This will allow those funds to be seasoned, and thus won’t require additional sourcing.
– Try to limit any activity (deposits, withdrawals, purchases, transfers) in said account(s) for the preceding months leading up to the mortgage application to avoid any unnecessary conditions or letters of explanation.
– Even if the mortgage company initially asks for bank statements, ask if a VOD will suffice. A Verification of Deposit (VOD) from your bank provides the overall balance of your account and your average balance based on the past two months. This may be better than providing bank statements, which could show payroll and other information that you may not want to disclose.
– 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 individual 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.
– Generally you can use money from a joint account for reserves and down payment, but you’ll typically need to provide a letter from the other account holders explaining that you have full access to the funds.
– If you have any recent large deposits (usually defined as one that exceeds 50% of total monthly income) in your accounts, they may be scrutinized and/or unavailable for underwriting purposes depending upon their size.
Tip: At the end of the day, make sure assets are in personal accounts and seasoned long before applying for a mortgage! And do your best to limit account activity during that time. It makes life easier for everyone.