When you're serious about looking for a home, your first step is usually to call a lender or visit their website to begin the prequalification process. At this stage, you'll provide information about your earnings, debts and assets, namely the money in your bank, investment and retirement accounts. While prequalification doesn't promise a particular loan amount or even mortgage approval, your available assets do impact how much your lender states you may be able to borrow and which loan program options you might have. However, assets are only one piece of the puzzle since your income and current debts also impact the potential loan amount your lender approves for you.
Since you'll need sufficient assets for your down payment, they can affect your prequalification in terms of how much money the lender estimates you can spend on a home and which mortgage programs for which you may qualify.
Basics of Mortgage Prequalification
The prequalification process involves sharing information such as your desired loan type and term, annual income, monthly debts, estimated house price, current credit score and contact information for each applicant. You'll also provide basic information about your assets, particularly how much cash you have in your bank account to put toward your down payment and closing costs. However, at this point you usually won't have to submit any documentation that proves your income, assets or debts yet.
Using the information you provide, the lender can generate an estimate of how much you may be able to borrow, but this doesn't act as a guarantee of mortgage approval. As a more official step, you'd seek a preapproval, which requires turning in documents about your income, debts and assets and having a lender examine them to determine the loan amount you're able to obtain. You'd need to also fulfill the underwriter's requirements, including any requests for documentation, through closing to actually obtain the mortgage.
What Are Assets for Prequalification?
When the lender asks you about assets during your prequalification or another step in the mortgage application process, they're mostly referring to liquid assets that you can easily turn into cash. This includes your savings and checking accounts, certificates of deposit, retirement accounts like 401(k)s and individual retirement arrangements, and portfolios of stocks, bonds and mutual funds. This asset category would also include cash you might store at home, but this can present challenges when it comes to documenting the source of the funds later on in the application process. Therefore, Quicken Loans suggests having any cash you plan to use deposited into a bank account where it should stay for a few months to "season."
If you plan to receive a monetary gift from a family member or other close contact to use toward the down payment, that gift money also counts as a liquid asset. However, you'll need to prove that the donor never expects you to repay them for the funds. In addition, each loan program has its own rules for who's allowed to give you gift money for this purpose.
Your lender may also ask you about any nonliquid assets you have. This would include things like your car, business, existing real estate and any other personal items of value. There is much less emphasis on these assets, though, since they're harder to turn into cash and provide less reassurance to lenders that you can use them for your housing costs.
How Assets Impact Prequalification
When you provide your financial information for qualification, your lender uses the estimated assets available for your down payment along with your income and debts to estimate the maximum loan and house price you can afford. For example, your income and existing debts may qualify you only for a $150,000 mortgage. But if you have enough assets for $25,000 down, you could afford to buy a home that is $175,000. You might also find that you need to lower your housing budget or wait and save up some more money when you lack the assets needed for a desirable property.
Assets also impact prequalification since each loan program will have its own minimum down payment requirement. For example, conventional loans can require anywhere from a 3 to 20 percent down payment, while Federal Housing Administration loans require anywhere from 3.5 to 10 percent, depending on your credit score. If you can't meet your desired program's minimum requirement, you may have to work with your lender to find a more suitable loan program, or you might consider seeking funds from sources such as gifts and down payment assistance programs.
Necessary Assets for Mortgage Approval
When you're ready to start an official mortgage application, typically during the preapproval stage, your lender will have you provide more detailed information about your assets for mortgage approval, including their value, description and source. While the assets you'll need will depend on your unique financial profile, loan program and mortgage amount, these are some guidelines of how much you might need and for what purpose:
- Down payment: The exact money you'll need for your down payment will depend on the lender, loan program and possibly your credit score. It can range from nothing at all (for Veterans Affairs and U.S. Department of Agriculture loans) to up to 20 percent for conventional and jumbo loans. In general, you can expect to need cash for at least 3 to 5 percent of the home purchase price, so budget $3,000 to $5,000 for each $100,000 you plan to borrow.
- Closing costs: Your closing costs will include fees such as those for your application, appraisal, credit check, escrow deposits, home inspections, loan origination fees and mortgage insurance. Zillow estimates you'll pay about 2 to 5 percent of the home's price, which works out to $4,000 to $10,000 for a $200,000 mortgage. However, you may be able to get the seller to assist with these costs or negotiate some of them with the lender.
- Mortgage reserves after closing: After your down payment and closing costs, the lender will also want to see you have some available cash for emergencies that will provide reassurance you can still make your mortgage payments if you experience hardship. Your lender may require that you have anywhere from two to 12 months of housing expenses in the bank.
Asset Verification for Mortgage
As you move through the preapproval and final approval stages, you can expect to submit sufficient documentation that proves your assets. This usually means completing an asset statement for mortgage and submitting the past few months of statements for your bank, retirement and investment accounts. Your lender will particularly pay attention to how long the money has been in your accounts and usually wants to see that it's been there for at least two or three months. You can also expect to document how and from where you got the money, especially if you've recently had some large cash deposits.
If you're using gift money, expect to have the donor write a detailed gift letter to submit to the lender for verification. This letter not only explains your relationship with the donor and their contact details but specifies the date of the transaction, the dollar amount and the agreement that the gift doesn't need to be repaid.
Lastly, if you have nonliquid assets, your lender may request proof of their value. For example, if you have a jewelry, coin or artwork collection, you may obtain an appraisal and submit that documentation. You may also present documents verifying the worth of any businesses, vehicles or properties you own.
- Rochester Home Equity, Inc: Verifying Your Down Payment, Closing Costs, Assets, Income and Debts
- TheTruthAboutMortgage: Assets and Reserve Requirements
- Guild Mortgage: Pre-Qualification Mortgage Calculator
- Chase: Take the First Step to Mortgage Prequalification
- Investopedia: 5 Things You Need to Be Pre-Approved for a Mortgage
- Quicken Loans: What’s a Verification of Income and Assets?
- Zillow: What Are Closing Costs and How Much Are They?