Verification of Assets & Reserve Requirements on a Mortgage Application
If you claim to have assets on a mortgage application, be prepared to verify them.
Just what does that mean?
Essentially, the lender is going to inspect those funds inside and out. They need to know where the funds came from and how you received them. Do you have cash deposits? Expect even more scrutiny. There’s no way to track cash, but lenders must know where your money came from.
What are Assets?
Assets are pretty much any money you have in any type of account. Savings and checking accounts are the two most common. Of course, there are many others including:
- Stock broker accounts
- Mutual funds
- Money market accounts
Any money you have invested that you claim as an asset on your application will go through the verification process.
Understanding the verification of assets & reserve requirements process
Verifying your assets means more than saying you have the money. The lender needs solid proof. In addition, that proof must be seasoned. In other words, the money must sit in your account for a few months. If you suddenly have a large deposit showing up in your account, two things might happen:
- The lender may not allow the use of those funds
- The lender will thoroughly investigate where the money originated from requiring plenty of paperwork and tracking
At a minimum, you’ll need to verify your assets with 2 months of bank statements. Lenders require this for every asset. However, if there are any red flags, such as recent large deposits, you can expect a lender to ask for as many as 12 months’ worth of bank statements.
What this means is that you can’t hold money under your mattress and expect a lender to accept it. If you are the type that doesn’t use bank accounts, start using one several months before you apply for a home loan. The longer the money sits in your account, the less the lender must do.
On the other hand, if you take that mattress money and put it into your account the month you apply for the loan, you’ll be in for a lot of verifying. Lenders need to make sure the money is yours and not a loan from someone that you must repay.
What lenders look for on bank statements
So you provide the last 2 months of your bank statements. What exactly does the lender look for on these statements?
For starters, as we discussed, they look for any large deposits. They may evaluate every deposit on your account, trying to match it up with your income. If something seems out of the ordinary, they will inspect it further, whether it’s a large deposit or not. It’s a good idea to have a record of where each deposit originated. A canceled check and deposit ticket will suffice. Let’s say for example that you sold your car and made a profit. The Bill of Sale, a copy of the check, and a deposit ticket will be enough proof for the lender of the money’s origination.
After they verify your deposits, they’ll look for other red flags, such as Non Sufficient Funds charges. If you have any, be prepared to explain them. This tells the lender that you are financially irresponsible. If you have a plausible explanation though, you may be able to get away with it. If you do have one or more NSF charges, consider waiting to apply for a mortgage until a few months have passed. The lender may not pay any attention if the NSF is too far in the past.
Finally, lenders look for reserves. This is money you have on hand should your income decrease or stop. This money helps make your mortgage payment. Lenders calculate how much money you’d have left after making a down payment and/or paying closing costs. The lender calculates how many mortgage payments you could make with those assets alone.
For example, let’s say you have $5,000 in liquid assets available. If your mortgage payment is $1,000 with taxes and insurance, you have 5 months of reserves available. The lender may use this as a compensating factor for a low credit score or high debt ratio. However, some loan programs created by banks require reserves on hand, so you may have requirements to meet.
Verifying your assets is a large part of the qualifying process. Without proper verification, a lender cannot use your assets which could leave you without a loan. Prepare your assets by going over your recent bank statements. Do you have any large deposits or NSF charges? If so, you may want to wait a few months before applying. If you don’t make sure you can source all of your deposits and have enough money for the down payment and closing costs. Your reserves play a large role in the approval process, so make sure to give it careful consideration.
We at Island Home Loans want to best prepare you for the home buying process. Our goal is for the loan process to be a seamless and smooth experience for you!
Keeping the following recommendations in mind will ensure a positive transaction:
CASH IS NOT ALLOWED – Due to mortgage lending requirements, cash is not an acceptable source of assets. All assets must have a verifiable source to comply with Anti-Money Laundering Laws. Any cash deposits into your bank account will be backed out of your balance and may leave you short on funds. Please do not deposit any cash prior to and during the loan process.
EARNEST MONEY DEPOSIT – When you make an offer on a home you will submit an earnest money deposit as a good faith gesture to the seller. The earnest money will be deposited by the Title Company. There are only two acceptable payment types, cashier’s check or personal check. The funds for the earnest money deposit can only come from accounts that our Team has already reviewed. If you are set on submitting your earnest money deposit from a different account, please allow us to review it first. Using cash to get a cashier’s check is not allowed for the same reason above, which is why money orders are also not acceptable.
ASSET REVIEW – When you submit your asset statements for review we are looking for sufficient funds for down payment and/or closing, funds transfers, and non-payroll deposits. Since all assets must have a verifiable source, we will need to track all funds transfers and document non-payroll deposits. Be prepared to provide this documentation to your Loan Officer.
What are the General Mortgage Requirements for First-time Homebuyers?
Below we help you understand the basic guidelines so you can prepare yourself financially to help lead you down the right path to Homeownership!
- Return to Buying Your First Home
- Assets & Reserve Requirements
- Credit Score Requirements
- Debt Ratios
- Stable income & Employment
- Down Payment