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Understanding Mortgage Requirements

When applying for a new home loan, your loan officer will need to verify your assets, and more specifically, your liquid assets. The lender needs to verify assets to make sure you have enough money to cover the cash required at closing which includes down payment, closing costs, and prepaid items; as well as the total reserves required for underwriting approval.

Types of Allowable Assets:

  • Checking and Savings Accounts
  • Earnest Money
  • Stocks
  • Bonds
  • Investments
  • IRA/401(k)/retirement accounts
  • Gift Funds
  • Selling non-liquid assets

Sourcing Assets

Guidelines for loan programs that require asset verification require that the lender source and/or season the assets.  Sourcing assets means that you can verify for the lender where all of the funds came from.  Seasoning assets means that the lender can verify that they have been in the account for at least two months.

Most loan programs do not require sourcing of assets as long as they have been seasoned for at least two months. This is important to remember when starting the home buying or refinance process because sourcing “strange” deposits into an account can many times be very difficult.  Many people make the mistake of moving large sums of money around to different accounts or depositing cash into an account thinking that this will make their overall financial standing look better to the lender.  But if the lender can’t source where those funds originated, they can’t be counted when the underwriter is reviewing the loan file. If those funds have been in the account for at least two months, sourcing the funds is many times not required.

Reserve Requirements

Reserves are simply defined as the amount of liquid assets you have left over after down payment, closing costs, and pre-paid items are paid at closing.  Lenders typically look at reserves in terms of numbers of months to cover PITI (Principal, Interest, Taxes, and Insurance – and monthly mortgage insurance if required).  Reserve requirements vary greatly depending on loan program, debt-to-income ratio, and credit score.  So it is wise to speak with a qualified loan officer to determine how many months of reserves are required for your specific situation.

Useful Tips

  • Make sure you give all pages of your bank/investment statements to your loan officer, not just the cover page.
  • Don’t move money around between accounts within 2 months of starting the mortgage process.
  • When using retirement accounts for asset requirements, the lender will normally only allow 60% of the balance. You will also need a copy of your plan guidelines showing there are no restrictions for early withdrawal.
  • If using business bank statements, you will need to have 100% ownership of that account. You will also be required to have an audited year-to-date profit and loss statement as well as a letter from a CPA documenting that use of funds from the account will not affect the business.
  • If you plan to sell personal assets such as an automobile, jewelry, art, antiques, etc. make sure that you have receipts/bill of sale to satisfy the source of funds.
  • If you have a joint bank account with someone who is not on the loan, your lender will require a letter from that person stating that you have full access to the funds.

If you don’t have many assets for a down payment, there are still options out there for you. You may qualify for down payment assistance.