Assets and Reserve Requirements

assets mortgage

When applying for a mortgage, a mortgage broker or lender will likely inquire about your assets, and more specifically, your liquid assets.

They’ll want to know what you’ve squirreled away in order to come up with a down payment, pay closing costs, and make monthly mortgage payments going forward once you close your loan.

Unless you’re relying on a documentation type that doesn’t require the verification of assets, it’s very important to make sure you’ve got plenty of assets in your personal bank accounts.

Along with that, you’ll want to ensure those assets are “seasoned” for at least two months (60 days) in most cases.

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Season Assets Two Months Before You Apply for a Mortgage!

  • It’s important to have your assets in a verified account
  • At least two months prior to applying for a home loan
  • Because banks and lenders generally ask for your two most recent bank statements
  • To verify your assets for down payment, closing costs, and reserves

Many prospective homeowners and those looking to refinance make mistakes when handling their assets prior to a mortgage transaction.

They may falsely assume they can just shuffle some assets from a friend or family member’s account into their own bank account without incident, then use them to qualify for a mortgage.

Unfortunately, this doesn’t fly with many banks and mortgage lenders because the money isn’t properly sourced or seasoned.

Banks and lenders want to ensure the money is truly the borrower’s money, and in the borrower’s account for several months before they’ll accept those assets as their own. If it just appears out of thin air one day, the lender won’t feel very comfortable about the legitimacy of those funds.

For example, attempting to use mattress money for your down payment likely won’t go over well. You might think, why not!? It’s my money, my hard-earned cash, why can’t I use it?

Well, the lender doesn’t know where that money came from if it just appeared in your bank account a couple days ago. Could you have taken out an undisclosed loan, borrowed money from someone, or acquired funds another way that could make you a riskier borrower than you appear? Sure and absolutely.

This is why mortgage lenders typically want to see that any assets used in the mortgage transaction are seasoned for at least 60 days. Put simply, this means providing two months of bank statements that show the funds being present in the account for that entire duration.

Why 60 days? Well, lenders will generally ask for the two most recent bank statements, which cover a span of 60 days, give or take. So anything that occurs prior to those two months of bank statements won’t be revealed to the lender.

For example, if you plan on using a specific bank account to verify your assets, you may want to move any necessary funds into that account 60-90 days before you apply for a mortgage. That way the money will be considered seasoned and the average daily balance of the account will be reflected as well.

The two most recent bank statements won’t show those funds transfers if they were completed 60+ days earlier, in a prior statement period.

And if the funds have been in the account for 60+ days, you shouldn’t need to source them beyond the bank account they’re in.

Conversely, if you move a sum of money into a bank account less than 60 days before you apply, the lender will see that deposit on the bank statement and likely scrutinize it.

And more importantly, ask for the source of those funds. If you don’t have a good answer, your loan application could be in jeopardy.

This is why seasoning assets is so important. Once they’re seasoned in a verifiable account, they are considered sourced and should be accepted without further review.

Ultimately, lenders want to verify that the borrower has established a savings pattern, and that the assets are sufficient to support the mortgage payment. Or in the case of anything less than full doc, support the stated income.

They ask that they be seasoned so the borrower doesn’t falsely inflate their financial position to obtain a lower mortgage rate, or to borrow more than they can truly afford.

Large Deposits and Mortgage Approvals Don’t Mix!

  • If your bank statements show recent large deposits
  • Expect the underwriter to ask for a letter of explanation
  • This is yet another reason why it’s often better to transfer any necessary funds
  • Several months before you apply for a mortgage

As mentioned, just because you have the money in your account doesn’t mean you’re good to go. This is especially true if you’ve made a large deposit or two recently to pad your savings.

For example, if you want to look better on paper prior to applying for a home loan, you might think it wise to transfer $10,000 into your checking or savings account.

That way you’ll have the amount necessary to cover down payment, closing costs, and reserves.

But wait, it’s not that easy. The underwriter is going to see at least your last two bank statements and that deposit and start asking questions if it looks unusual.

And by unusual, I mean a large deposit relative to your overall balance or savings history.

If you only had $1,500 in that account, then all of a sudden dumped $10,000 into it, it will surely be scrutinized, especially if you only make $50,000 a year in salary.

Now this is totally fine if you have a legitimate paper trail to back it up. But if you borrowed that money, or simply can’t document it properly because it was lying around your house, it could be grounds for denial.

To avoid this unnecessary attention, you’ll either want to move the money several months in advance of your home loan application, or simply leave it where it’s at if it’s in a suitable account.

Even moving money from one verifiable account to another can raise new red flags if the underwriter sees stuff they don’t like in either account. Put simply, the more accounts that are involved, the more documentation requests, and the greater potential for trouble.

In a perfect world, hopefully you have all the money you need in a savings account that has had very little to no activity in the past 2-3 months. That way no questions will be asked, hopefully!

Asset Reserve Requirements for a Mortgage

  • Aside from down payment funds and closing costs
  • Mortgage lenders may also require reserves
  • Which are additional funds to cover monthly housing payments
  • To ensure you have the capacity to make your payments going forward

If you get your hands on a rate sheet, or talk to a bank or mortgage broker, they’ll usually tell you how many months of reserves you’ll need to verify assets and qualify for a mortgage.

Asset requirements will be defined in terms of PITI (Principal Interest Taxes and Insurance), meaning you’ll need enough money to pay for “X” amount of months of mortgage payments including principal, interest, taxes and homeowners insurance.  And mortgage insurance, where applicable.

Reserve requirements will vary from bank to bank, and from mortgage program to mortgage program, but you can get a good idea of what you may need to provide for different property types.

– Owner-occupied residences typically require two months PITI in reserves, but may ask for up to six months. In some cases you might not need any though!

– For second homes, reserves can range between three to four months, but again, can be higher.

– On non-owner occupied properties, otherwise known as investment properties, reserves are usually six months PITI or more.

Even if you apply for a no down payment mortgage, reserves may still be required to show the lender you’re able to make monthly payments.

Reserves Needed for Specific Types of Loans

  • The amount of reserves necessary will vary by loan type
  • And by property type (such as number of units)
  • Typically need at least 2 months of reserves
  • But could be as high as 12 months or even more!

For Fannie Mae and Freddie Mac loans (conforming), reserve requirements vary based on credit score and LTV, along with property type.

For example, no reserves may be required for a 1-unit primary residence, whereas two months may be required for a second home, and six months for a 2-4 unit primary residence or investment property.

Ultimately, they can range from as little as zero months to as much as 12 months, depending on the scenario.  As a rule of thumb, more risk requires more reserves.

There is no reserve requirement for FHA loans on 1-2 unit properties. However, 3-4 unit properties typically require three months of PITI.

For USDA loans, no reserves are required, but they can be used as a compensating factor if necessary.

For VA loans, there isn’t a reserve requirement unless it’s a 3-4 unit property and you’re using rental income to qualify, at which point six months reserves are required.  Additionally, three months of reserves are required for each rental property owned that is not secured by a VA loan.

For jumbo loans, reserve requirements can vary tremendously, from as little as six months to several years, depending on how large the loan is.

Allowable types of assets:

  • Earnest money deposit
  • Checking/savings/CD/money market accounts
  • Verification of Deposit (VOD)
  • Business accounts
  • Stocks
  • Bonds
  • Mutual funds
  • IRA/401k and other retirement accounts
  • Gift Funds/Gift of Equity
  • Sale of assets

Ineligible types of assets:

  • Cash on hand
  • Undocumented funds (mattress money)
  • Sweat equity
  • Unsecured borrower funds
  • Illegally obtained funds
  • Cash proceeds from a cash out refinance
  • Lender contributions
  • Seller contributions
  • Funds that haven’t been vested
  • Stock held in an unlisted company

Some useful tips regarding using assets for a mortgage:

– Move money into a checking or savings account the minute you start looking for a property. This will allow those funds to be seasoned, and thus won’t require additional sourcing.

– Try to limit any activity (deposits, withdrawals, purchases, transfers) in said account(s) for the preceding months leading up to the mortgage application to avoid any unnecessary conditions or letters of explanation.

– Even if the mortgage company initially asks for bank statements, ask if a VOD will suffice. A Verification of Deposit (VOD) from your bank provides the overall balance of your account and your average balance based on the past two months. This may be better than providing bank statements, which could show payroll and other information that you may not want to disclose.

– You may also use retirement accounts, but lenders typically only consider 70% of the total, so factor that in to ensure you have enough to cover reserves. *This can vary based on your individual lender’s guidelines.

– If you plan on using business accounts for assets, you’ll likely need to be the 100% owner. Although if you own only 50%, some lenders will accept a CPA letter stating what percentage the borrower has access to, and that the use of those funds won’t affect the business negatively.

– If you sell personal assets, make sure you save receipts to prove the source of funds. Acceptable items usually include automobiles, coins, art, and antiques.

– Generally you can use money from a joint account for reserves and down payment, but you’ll typically need to provide a letter from the other account holders explaining that you have full access to the funds.

– If you have any recent large deposits (usually defined as one that exceeds 50% of total monthly income) in your accounts, they may be scrutinized and/or unavailable for underwriting purposes depending upon their size.

Tip: At the end of the day, make sure assets are in personal accounts and seasoned long before applying for a mortgage! And do your best to limit account activity during that time. It makes life easier for everyone.

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