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Asset Based Lending
Mortgage loan lenders will look at a number of things during the loan application process. Your income (ability to make payments on the loan), credit (history of willingness to repay), cash reserves and personal property are all considered. Assets are often overlooked, yet very important. Assets are essentially anything you control that has value. Your home lender will want to know how you can raise money for payments in order to judge your borrowing potential.
Lenders will want you to demonstrate the financial stability to easily afford your mortgage payments. You need to make sure that your assets are seasoned enough to encourage a long term return for the lender. The lender wants to know why and when you’ll be getting the money you earn. This means that regular, large deposits in your bank account can be verified and accounted for.
Assets that are commonly considered in loan applications include retirement funds, stock, mutual funds, bonds or insurance policies, etc. Most often, assets considered for real estate purposes have an estimated value on par with boats or homes. Even borrowers with limited income can qualify for loans if they have a sufficient amount of liquid assets.
Documenting Assets for Mortgages
Any money used for your down payment will need to be documented to account for closing costs. The simplest way to do this is to use bank statements. Bank statements can provide proof of the ability to pay on the loan. Official bank statements showing the trail of the money can help to “season” your assets.
Expect to document all of the funds you put towards your down payment as well as any other savings you have. If you ever run into financial trouble, you can use your reserves to pay the mortgage loan. Lenders want to know that you have the ability to make good on your promise in the case of any financial hardship.
Assets include any money used for:
- Down payment
- Closing costs
- Reserves (money left over after closing)
- Costs like property taxes, homeowners insurance and escrow account deposits
Avoiding Asset Issues
If you are using gift money for your down payment, expect to provide additional documentation. You need a legal affidavit to provide information on the transaction. Typically, lenders will have the donor sign a letter which states the relationship to the buyer, the location of the property that is being purchased, and the amount of money given. In this document, it’s explicitly stated that the money provided is a gift and not a loan.
Underwriting for Asset Based Loans
There are some common problems that you might run into during the underwriting process. There are a few things to make note of and avoid if possible.
- Do you have large deposits in your account that seem excessive for your income? You’ll need to have a reasonable explanation for all major deposits in your bank account. This can easily be remedied with proper documentation as long as you can demonstrate the ability to repay the mortgage.
- Large cash deposits are a red flag for underwriters. You’ll need to provide documentation supporting your income.
- Are you getting gift money or help from the seller? If this is the case be wary, some lenders may have reservations about your ability to repay the mortgage.
