Qualifying for a mortgage means that you can prove that you can afford the payment. As a part of the process, you’ll also have to prove that you have assets. Buying a home requires at least some type of down payment and money to cover the closing costs.
Beyond the money needed for the down payment and closing costs, you generally don’t need assets. That being said, money on hand can definitely help turn a borderline approval into a sure thing. Money on hand decreases the risk of default on your mortgage in the future.
So how can assets help you get a mortgage? Keep reading to find out.
You Need Enough Assets to Buy the House
Every loan program requires you to have enough money to put down on the home. Each loan program has different down payment requirements. They are as follows:
- FHA loans – 3.5% down payment
- VA loans – 0% down payment
- USDA loans 0% down payment
- Conventional loans – 5% down payment
On top of the chosen down payment, you must have money to cover the closing costs. Estimate between 3% and 5% of the loan amount for this fee. For example, a $200,000 loan may cost between $6,000 and $10,000 to close.
Assets Beyond the Down Payment and Closing Costs
Once you prove there is enough money to cover the down payment and closing costs, most loan programs don’t require assets. But, if you are borderline between approval and denial, savings or investments can help get the necessary approval.
Lenders look at assets in terms of the number of mortgage payments they can cover. For example, if your mortgage payment is $1,000 and you have $10,000 in assets, you have 10 months of reserves. In the eyes of a mortgage lender, that’s a lot of reserves.
Most mortgage programs today only need reserves between 2 and 6 months depending on:
- The type of loan
- The number of units in the property
The more units a property has, such as a 4-unit property, the higher the risk of default becomes. When the risk of default is high, lenders tend to require assets on hand to lower that risk.
Looking Closer at Your Assets
Having assets on hand isn’t enough to secure your approval, though. Lenders will ask for asset statements for the last two months. They look at the statements for any large deposits in that time. Let’s say you had a $5,000 deposit last month. The lender will ask where it came from – including a paper trail to ensure its legitimacy.
What lenders need to know is that the money isn’t a loan that you didn’t disclose elsewhere. New loans can take a few months to show up on a credit report. Lenders use your bank statements to determine if there is a loan pending out there. If you can’t provide adequate proof of where the money came from, the lender won’t be able to use the assets in their lending decision.
Assets Must be Liquid
In order for lenders to count your assets, they need to be one thing – liquid. In other words, ownership in another home, a boat, or a business may look good on paper, but they don’t help you pay your mortgage. You can’t liquidate these things quickly to make your mortgage payment.
Instead, lenders look for liquid assets, such as:
- Checking/savings accounts
- Stock market investments
- Retirement savings
Lenders can’t take the face value of every asset, though. For example, lenders typically use between 70% and 80% of your retirement savings balance to account for penalties and taxes that you must pay. Talk to your loan officer about the type of assets you have to see what percentage of the face value they will use.
Assets as a Compensating Factor
Assets can be what lenders call a compensating factor. If you have a lower than average credit score or higher than required debt-to-income ratio, you can offset that risk with money on hand. This isn’t a blanket policy though – it’s on a lender-by-lender basis.
For example, if you have a 640 credit score and $10,000 in assets, one conventional lender may turn you down. Another lender may allow the low credit score to slide since you have $10,000 in savings. This is why it’s important to shop around with at least three lenders to see what options are available.
Assets certainly can’t hurt your loan approval. In most cases, it can help convince a lender to give you the loan you need. Make sure you get your assets in line first. Wait until all funds are seasoned (no large deposits in the last 2 months) before you apply for a mortgage for the best results.