Your Mortgage Application: What You Should Know!

Lenders evaluate the following when underwriting a mortgage for approval:

1)    INCOME – The ability to repay

2)    CREDIT – The willingness to repay

3)    COLLATERAL – What’s the value and condition of the property being financed

4)    ASSETS – for down payment and reserves after closing

1 – 3 are pretty self-explanatory, assets may be the least discussed and most important factor in loan approval.

What is meant by “assets”?

1)     Monies for down payment

2)     Monies for closing costs – lender and other third-party charges – appraisal, title etc

3)     Monies for pre-paid costs – insurance, property taxes and mortgage interest due

4)     Monies for reserves –this is what’s left over in your ‘liquid’ accounts, meaning it can be w/d immediately and w/o penalty. For any unforeseen emergency, should the need arise.

Why do lenders care about “assets”?

1)     It demonstrates the borrower’s fiscal strength. The ability to save and budget is a significant indicator of future paying habits.

2)     Where did the monies come from? Savings, gift, lottery etc.  Lenders want a clear paper trail.

3)     The borrower may have a few late payments, but have excellent cash reserves. The lender will take this into consideration as a compensating factor.

Common mistakes:

Large Deposits and Cash Deposits – Where did the money come from? Was it from a loan that requires monthly payments not reflected in the debt to income ratios?

Gift monies – While acceptable, borrowers are usually required to have at least 5% of their own monies in the bank, whether they use it or not unless there is a 20% down payment. Will the borrower be able to repay the loan?

Lenders may want to know where the money came from to pay down credit cards in order to qualify.