Assets and Mortgage Reserves Requirements
Understanding Asset Requirements when applying for a mortgage loan.
When applying for a mortgage loan other than a No-Documentation type of loan, you will be required to provide verifiable information about your liquid assets to cover your down payment, pay closing cost, and make your monthly mortgage payments (reserves) going forward after you close your loan.
What are Allowable types of Assets?
These assets can be from the following types of sources.
- Checking, Savings, CD or Money Market Accounts
- IRA/401k and other retirement accounts
- Earnest Money Deposit
- Stocks and Bonds
- Sale of Assets
- Seller Contributions
- Business Accounts
- Gift Funds
These Assets should be "Seasoned" for at least two months (60 days before applying for a mortgage loan) Seasoned means that these liquid assets have remained untouched during this timeline. It is essential to have your assets in a verified account. Lenders will typically require you to provide your most recent two months of bank statements.
What are Ineligible types of Assets?
- Cash on hand
- Undocumented funds
- Unsecured borrower funds
- Illegally obtained funds
- Sweat Equity
Don´t make these types of mistakes when applying for a mortgage!
Don´t assume you will not be required to verify your assets. Moving money into your account from a family member or close friend will not work. The lender wants the money to be yours and adequately sourced or seasoned. If this money just showed up in your account(s), they won´t feel comfortable about the legitimacy of those funds. To be genuinely your money, then these funds need to be in your account for several months.
Don´t take out an undisclosed loan or borrow money from someone to show you have the required assets.
Don´t move assets around 60 days before applying for a loan. If you are using allowable assets from other account sources, then do your planning beforehand and transfer funds 60 – 90 days before applying.
Large deposits and mortgage approvals don’t mix very well.
What are mortgage reserves?
Reserves are readily available emergency funds that will help you pay for housing expenses if your income stops for any reason. When lenders consider approving a mortgage loan application, they look for as little risk as possible. Reserves are measured in the number of months that your housing expenses are and that you would be able to cover these expenses with savings.
Typically, you don´t need reserves when purchasing a primary residence. Although if your credit score is low or you are buying a second home, investment property, or multi-unit property, it is more likely you will need to have some reserves on hand to satisfy lender requirements.
Can Borrowed funds be used for reserve requirements?
If the borrowed funds are secured against owned property or vehicle you own, then the answer would be yes.
If the funds came from an unsecured source like a revolving credit card, unsecured credit line, or a family member and were deposited less than the last two months, the answer would be no. To qualify as "seasoned" funds, these deposits need to be two months or longer to be acceptable as mortgage reserves.
Can Gifted funds be used for reserve requirements?
Freddie Mac, Freddie Mae conventional mortgage loans, along with FHA and VA loans, allow gift funds to be counted towards mortgage reserves.
Compensating Factors
Even when mortgage reserves are not required to qualify for a home loan, they can serve as a compensating factor for marginal loan applications. According to FHA and VA, compensating factors could affect the loan decision regarding loan applicants with low credit scores or high debt to income ratios.
