Wednesday, May 23, 2007
Why are documented assets required when closing a mortgage loan and what are seasoned assets?
With the exception of a few types of mortgages, most lenders will require borrowers to show assets along with their income documentation. Assets as they pertain to a mortgage are sometimes referred to as “reserves.” Reserves are the number of months worth of mortgage payments you have available in assets. For a simplified example, if you are applying for a mortgage that has a total PITI* payment of $1,000 a month and you have $6,000 in your checking account, you have 6 months of reserves.
If you have a strong credit profile, very few, if any, reserves are necessary. If you have a little bit weaker profile (maybe a lower credit score or high loan-to-value ratio), reserves can help you qualify for a mortgage you may not have without them. The reasoning behind reserves is that if something were to happen to the borrower along the lines of a work layoff, serious illness, or accident, the mortgage would still be paid while the unexpected situation sorts itself out.
Assets are shown in a couple of different ways. The most common is to provide bank statements for asset accounts. These assets are usually 401k, checking, savings, IRA, mutual funds, stocks, etc. All pages of the statement must be shown and occasionally more than one month. Most underwriters will accept this method of documentation for assets.
The second way to document assets is called a verification of deposit (VOD). This requires the borrower to provide the mortgage broker or lender with their bank account info (bank and account number). The broker or lender then sends a standard form to the bank where the account is held. The bank generally verifies the amount in the account, average daily balance, and two months worth of balances.
“Seasoned assets” are those that have been in an account for two months or longer (some banks require three months). The reason most banks require seasoning is so that a borrower can’t just put assets (most likely not their own) into an account for the purpose of showing reserves and then remove them. Underwriters want a true picture of a person’s financial situation when approving them for a mortgage.
Certain assets are considered at face value and others are discounted. Liquid assets such as checking, savings, and mutual funds are generally considered at face value meaning if you have $3,000 in your checking account, they will give you $3,000 worth of consideration for those assets. Other assets such as 401ks, IRAs, stocks, bonds, etc. are usually taken at about 70% of face value. The reason for this is that most retirement accounts have penalties (taxes and early liquidation), so they are not worth face value in a crisis. Also, stocks may be worth one thing today and less tomorrow, so they are not usually taken for full value.
As I mentioned before and in other articles, some mortgages either don’t require assets, or they are not verified, meaning you simply how much you have in the bank and the lender takes your word for it. Obviously, this is more risky for the lender, so it can come with higher rates. With a strong credit profile, it may not cost you anything as far as rate or costs.
As always, if you have any questions regarding asset documentation or anything else, please do not hesitate to call or email me for a quick answer.
Arizona Mortgage Pro
If you have a strong credit profile, very few, if any, reserves are necessary. If you have a little bit weaker profile (maybe a lower credit score or high loan-to-value ratio), reserves can help you qualify for a mortgage you may not have without them. The reasoning behind reserves is that if something were to happen to the borrower along the lines of a work layoff, serious illness, or accident, the mortgage would still be paid while the unexpected situation sorts itself out.
Assets are shown in a couple of different ways. The most common is to provide bank statements for asset accounts. These assets are usually 401k, checking, savings, IRA, mutual funds, stocks, etc. All pages of the statement must be shown and occasionally more than one month. Most underwriters will accept this method of documentation for assets.
The second way to document assets is called a verification of deposit (VOD). This requires the borrower to provide the mortgage broker or lender with their bank account info (bank and account number). The broker or lender then sends a standard form to the bank where the account is held. The bank generally verifies the amount in the account, average daily balance, and two months worth of balances.
“Seasoned assets” are those that have been in an account for two months or longer (some banks require three months). The reason most banks require seasoning is so that a borrower can’t just put assets (most likely not their own) into an account for the purpose of showing reserves and then remove them. Underwriters want a true picture of a person’s financial situation when approving them for a mortgage.
Certain assets are considered at face value and others are discounted. Liquid assets such as checking, savings, and mutual funds are generally considered at face value meaning if you have $3,000 in your checking account, they will give you $3,000 worth of consideration for those assets. Other assets such as 401ks, IRAs, stocks, bonds, etc. are usually taken at about 70% of face value. The reason for this is that most retirement accounts have penalties (taxes and early liquidation), so they are not worth face value in a crisis. Also, stocks may be worth one thing today and less tomorrow, so they are not usually taken for full value.
As I mentioned before and in other articles, some mortgages either don’t require assets, or they are not verified, meaning you simply how much you have in the bank and the lender takes your word for it. Obviously, this is more risky for the lender, so it can come with higher rates. With a strong credit profile, it may not cost you anything as far as rate or costs.
As always, if you have any questions regarding asset documentation or anything else, please do not hesitate to call or email me for a quick answer.
Arizona Mortgage Pro
