When lenders evaluate mortgage borrowers, they look at four things: income (the ability to repay), credit (the willingness to repay), collateral (appraised value and property condition) and assets (cash in the deal and cash reserves after closing, mostly). Of the “four legs of the table”, assets are the least discussed, and yet may be the most important.
What do we mean when we talk about assets?
Monies needed for the down payment (the difference between the purchase price and the loan amount which may or may not be the same as the money deposit at contract signing)
Monies needed for closing costs (fees to the lender and third parties for things like appraisals, title insurance, settlement services, and so on)
Monies needed for Pre-Paids (homeowners insurance, flood insurance, real estate taxes, etc.) and establishing escrow accounts for future payments
Monies for Reserves- the money you still have left after closing. Monies that would be available, if a problem were to arise.
Why do we care about assets?
Assets may be the truest reflection of a borrower’s fiscal strength. Their ability to save and properly budget could be a significant indicator to their future paying habits.
The source of the assets is important. Savings? Gift or inheritance? Lottery victory? Insurance settlement? Sale of a baseball card collection? Each reflects differently on the borrower.
Many people don’t show all their income on their tax returns (it’s just a fact). Undocumented income can’t be used to qualify; however, often assets become a truer representation of a borrower ability to pay than their 1040s.
Reserves are an issue. A client with $50 in the bank after closing is riskier than one with $50,000. Also, clients who have money in the bank but have some sporadic lates on their credit are looked at differently than those who didn’t have the money to make the payments.
Common Asset Issues in Mortgage Packages:
Large deposits (defined as those which are excessive for the income level) raise an underwriter’s eyebrows. Where did the money come from? Maybe the borrower took a loan that doesn’t yet show up on their credit report.
Cash deposits are another red flag. In this day and age, people keep their money in the bank, not under their mattress. Where did the cash come from?
Gift monies and seller’s concessions, while considered as borrowers assets when doing calculations, will give an underwriter pause when assessing the borrower’s real ability to replay.
Guidelines have tightened. When borrowers are paying off credit cards to get their ratios in line, lenders are asking where that money came from now. That act has nothing to do with the home purchase, but may be a sign of something fragile in the borrower’s financial make up.
The best advice is to consult a loan professional to discuss the proper way to position your assets and the timing of it that will put you in the most favorable light.
by Dean Hartman, The KCM Blog