If someone came to you and asked to borrow hundreds of thousands of dollars for 30 years or so, you'd probably have a lot of questions. So would anyone -- including the mortgage companies that actually do lend people hundreds of thousands of dollars for 30 years or so. Lenders want to know everything about your finances, which is why a home loan application expects you to list all your assets and your liabilities.
Your assets are the things you own. Before they will approve you for a loan, mortgage lenders typically require that you have a job or some steady source of income that will allow you to make the payments. But they also recognize that people can lose their jobs, and other income sources can dry up. That's why they like to see applicants with other assets that they can convert to cash, if necessary, to keep up with their house payments.
Types of Assets
Most mortgage lenders use some variation of the "Uniform Residential Loan Application," a document drawn up by Fannie Mae and Freddie Mac, two huge government-backed corporations that buy mortgages from lenders. The uniform application divides loan applicants' assets into two categories: liquid and non-liquid. Liquid assets are those held in cash or easily converted to cash, including checking and savings accounts; stocks, bonds and other securities; and life insurance policies with a cash value. Non-liquid assets are harder to convert into cash but are still valuable. They include real estate, cars, assets in retirement plans, businesses owned by the applicant and any other item of material value. (Got a rare stamp collection? List it under "other.")
Liabilities are your financial obligations -- the regular bills that you have to pay. Lenders look at your existing obligations and compare them to your income to decide how much new debt (if any) that you can handle. If too much of your income is already spoken for, you might be denied a loan -- or you might be charged a higher interest rate because you present a higher credit risk. Different lenders have different standards, but a common rule of thumb is that your total debt payments -- including the mortgage you're applying for -- should be no more than 36 percent of your gross income, and your housing expenses should be no more than 28 percent of gross income. (Gross income is what you make before any taxes and pre-tax deductions.)
Types of Liabilities
The Uniform Residential Loan Application asks you to identify all your debts and give the name of the creditor, the amount of your monthly payment, the months left to pay and the current unpaid balance. The application specifically asks for information on real estate loans; car loans; revolving charge accounts, such as credit cards and lines of credit; alimony and child support; and job-related expenses such as child care or union dues.
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