Fewer topics in the home finance process generate as many questions as those with regard to documenting assets and reserves. Specifically the assets you are able to use for a down payment when you’re buying a home.
What is an Asset?
Assets, often referred to as liquid assets, are those that you use to put down as your down payment when you buy a home. Or, assets you have in reserve to use for expenses and mortgage payments if you were to need them. The term “liquid assets” refers to either cash, or something that could easily be turned into cash.
The most common types of assets are checking and savings accounts, followed by retirement accounts. With regard to retirement accounts that are used as reserves, lenders, due to the volatility of the market, will only allow a percentage of the value. Typically 70% of retirement assets are counted towards your available liquid assets.
For example, if you have $10,000 you would be able to claim just $7,000 of it as reserves and/or for other uses in the transaction.
Borrowers often ask if they can list items such as cars or motorcycles as assets. This is a great question. The answer to both types of vehicles is no, as well as for other types of assets, say jewelry for instance.
This is partially because the lender would have no way of accurately determining the value of something and you would need to sell the vehicle or other asset and this can be difficult.
Documentation of Assets
If there is an area of home finance that receives a greater level of scrutiny from the lender, it is assets. If you are providing bank statement for example, any large deposits that are showing in the last 90 days will need to be fully documented.
Large deposits can raise questions with the underwriter. Usually any large deposits over $2,000 will need to be explained if they occurred within 90 days of application.
If you were to sell a vehicle for, say $5,000 to put toward a home, you would need to provide a bill of sale showing the date and amount of that sale, and a copy of the deposit transaction from the bank.
If you were to receive a gift from a family member, with the intent of using that gift as part or all of your down payment, the provider of the funds would also need to prove that they also have the means to provide the gift.
FHA does allow for “gift funds” as a down payment. The gift giver would need to sign a special gift letter stating that the funds specifically do not need to be repaid. They would also need to show 2 months of bank statements and the withdrawal slip or cancelled check showing how you received the gift.
The “donor” as they are called, needs to be a direct relative of yours, it cannot be a friend or business associate.
It is possible to use gift funds from a family member to buy a home with conventional (Fannie Mae or Freddie Mac) financing however, the total of your own funds and the gift funds need to add up to at least 20% of the purchase price.
Asset Requirements When Buying a Home
Fannie Mae and Freddie Mac have two month reserve requirements, meaning you need to show that you have two months of mortgage payments, including taxes and insurance on hand. This is referred to as P.I.T.I. or principle, interest, taxes and insurance.
FHA usually does not require reserves on a refinance. FHA does not require reserves on a purchase of a single family residence either however, it is important to remember that the presence of reserves does strengthen the file and can be a strong compensating factor to the underwriter.
FHA does however require a minimum 2 months of PITI available in reserve after closing on a purchase of an owner occupied 2 – 4 family. This is to cover you in the event a tenant fails to pay rent.
A Couple of Asset Documentation Pitfalls to Avoid
- Assets held in foreign accounts are typically not going to qualify. There are some portfolio programs where they will but, for a normal FHA or Conventional purchase or refinance they won’t.
- Please be sure to supply copies of actual account statements. A printout from your online banking portal which shows a summary of accounts will not work. Some banks supply PDF statements and they will work if that is standard at your bank.
- A bank statement will always give a “Page 1 of 6” in the bottom corner of the statement. Please remember to provide copies of all pages of that account statement, even if the last page appears to be worthless. If it says “Page 1 of 6” you’ll need to provide all 6 pages.
- Remember that you will need to verify any and all large deposits that occurred in the 90 days prior to your application.
- When using gift funds from a family member to buy a home with FHA financing, be sure they are aware that they will need to sign a Gift Letter. This letter will require them to document their ability to give the gift and it will require them to verify that they are not expecting to be repaid.
- Household assets such as cars, ATV’s, baseball card collections and coins are great assets but, they cannot be used for reserves or down payments. They would need to be sold prior to closing in order to be used as liquid assets.
- No portion of your down payment can come in the form of cash. You will not be able to bring a stack of cash to the closing table. Each and every dollar must be verified and have a clean chain from your account to the closing.
- Mattress money. Again, a great thing to have but when you are applying for a mortgage it must be taken out from under the mattress (or safe) and deposited into the bank in advance. Preferably 90 days in advance.
It may seem as though documenting your assets is a complicated process but, just remember that common sense will always be the answer.
Your loan officer at Poli Mortgage Group will be able to navigate the process and help you find the best way to document your funds, we’ve seen it all and we’re here to help.
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