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 properly 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 Reserve Requirements
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.
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 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
- 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 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 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!