Prequalifying Your Assets for a Mortgage Loan Approval
As mentioned, your mortgage loan prequalification actually revolves around prequalifying four elements:
- Property
- Assets
- Credit
- Income & Employment
This sub-section provides a quick overview of personal asset issues that are considered during the mortgage loan application and approval process.
Assets
First of all, you do not need to disclose all of your assets—you just have to disclose enough to qualify. Hard assets such as cars, jewelry and personal effects are rarely ever fully disclosed; they need to be disclosed only when necessary to show positive net worth.
The main asset requirements regard your liquid assets or cash deposits. All deposits to be used for a mortgage transaction should be documented in a bank account with monthly statements for at least three months. Acceptable liquid assets include the following:
- Savings and checking accounts
- Stocks, bonds, mutual funds and other securities
- Individual Retirement Accounts (IRAs), 401Ks and similar retirement accounts
- Profits from sale of property
- Home equity loans and credit lines
- Gift funds
- Seller subsidies or credits
For more details about asset requirements and source restrictions of specific loan programs, please consult the “Purchase Funds Required” chapter.
Conventional loans normally do not accept funds with undocumented or undocumentable sources, such as cash saved at home and most secretly borrowed funds. ”Mattress money” should be deposited as soon as possible so that they may “season” at least two-to-three months in the borrower’s account.
Underwriters are wary of any sudden and recent large deposits, as they often indicate unacceptable cash. The reason for these asset documentation requirements is that borrowed funds can decrease the borrower’s net worth, increase their debt-to-income ratios and jeopardize their financial stability with future payment demands.
The borrower must show that there are sufficient liquid assets to qualify for the loan program requested. Use the following worksheet to estimate how much you will need:
| $ | Down Payment. For most single-family homes, down payments of 10% are typical. Two-unit properties normally require at least 20% down; 3-4 unit properties often require 20% down payment. But there are low down payment options — especially if you qualify for FHA financing. |
| $ | Closing Costs. You should estimate at least about 3% of the price or $2,000 (whichever is more) in projected closing costs at the time of settlement. But there are also low and no closing cost options available. |
| $ | Insurance. You will need to purchase and prepay a full year’s homeowner’s (hazard) insurance coverage, plus flood insurance (extra), if the property is in a flood zone. Hazard insurance normally runs $400-$700 per year for most single-family homes and up to $1,000 for 2-4 units. Condominiums are exempt from this requirement, as property insurance is part of the condo association assessments. |
| $ | Escrow Impounds. You should be prepared to place three months ofproperty tax, homeowners insurance, private mortgage insurance (PMI), flood insurance and condominium assessment payments, as applicable, into an escrow account. |
| $ | Reserve Requirements. You must show that, even after paying all other costs, you will still have liquid assets equal to at least two months of projected housing payments. |
| $ | TOTAL. Again, if you’re having trouble qualifying for the loan you are seeking, there are always exceptions. Use the prequalification directory to find a knowledgeable mortgage professional to help you find solutions for your mortgage needs. |
Again, if you’re having trouble qualifying for the loan you are seeking, there are always exceptions and alternatives to the guidelines. Use the prequalification directory to find a knowledgeable mortgage professional to help you find solutions for your mortgage needs.
