What Are Assets & Liabilities on a Home Loan Application?

Buying a home is a big commitment. Few people have hundreds of thousands of dollars burning a hole in their pockets, which means they’ll need a loan to make the purchase. When you apply for a mortgage loan, you’ll probably notice the request to list your assets and liabilities.

Your assets include your cars and businesses you own, as well as any money you have invested or in bank accounts. Your liabilities include debts like car and student loans, child support and alimony payments and credit card balances.

When you apply for a mortgage loan, the lender is concerned, first and foremost, with whether you’ll be able to make payments in a timely, reliable manner each month. You will need to list all assets you hold on the form, as will anyone acting as a co-borrower on the application. You’ll also be asked to list the current value of each asset on the application, so you may want to check your bank balances before you start filling it out.

In addition to assets, your home loan application will also request information on any debts you and/or your co-borrower hold. This information will be used to determine your ability to repay the loan, in addition to verifying your employment and income. It’s important to be honest about all this information, as the lender will check into it and require documentation like the asset statement for mortgage that verifies the last two months for all your stated assets.

The word “asset” refers to anything that is useful or holds value. You probably have plenty of assets – in fact, you’ll be packing them up in boxes and moving them if your home purchase goes through. But a lender doesn’t care about your spoon collection or the guitar your favorite uncle gave you when you were a kid. Your lender wants to know about the funds you have in various accounts.

The asset verification that mortgage companies do relates primarily to checking, savings, retirement and investment accounts you hold at the time you apply for a home loan. You’ll need the current balance for each account, although your lender will understand this can reasonably change from one day to the next. You’ll also need to list all vehicles, as well as any businesses you own.

Having plenty of money in savings means you’ll have mortgage reserves after closing, which can provide some comfort to your lender. However, if your debts exceed your income too much, your lender may be concerned that those reserves won’t be around long. For that reason, you’re asked to name any liabilities you currently hold.

Lenders don’t want to know about your monthly spending habits. They do want you to list your ongoing debt, including credit card balances, student and vehicle loans and alimony or child support. You’ll need to list this for any co-borrowers as well. Even if you pride yourself on being debt-free, your co-borrower’s situation will still be a factor.

When you’re saving to buy a home, expert advice places an emphasis on having enough for the down payment and closing costs. But lenders will also look at how much cash you’ll have on hand after you’ve handed over tens of thousands of dollars at closing. Although it won’t make or break your loan approval when all else lines up, your mortgage company will like to see that you have cash reserves to be able to cover any emergencies that arise.

When looking at mortgage reserves, lenders will use a formula to determine how many months your savings could cover if you should suddenly lose your income. That formula will be the money you have in reserves divided by your housing costs, which will give the number of months you’ll be able to cover your full mortgage. Although it isn’t required to have a minimum number of months' worth of reserves, it does factor into the lender’s confidence in you.

Listing your statements and liabilities are only the beginning, though. You’ll have to back up that list with documentation. Your lender will want to see documentation for the past two months for each asset you’ve named. This means you’ll need the past two months of statements for all checking, savings, retirement and investment accounts you’ve listed as assets on your application, known as the asset statement.

When you’re providing an asset statement for mortgage, the lender’s primary concern is confirming that your closing costs are coming from a valid source. If your lender looks at your bank statement and sees a sudden deposit of a large amount of money, for instance, it’s important that they verify that you aren’t sneaking money into the account to cover it. For that reason, your mortgage company may request documentation for any unexplained deposits into your account during that time.

One important part of asset verification that mortgage companies do is verifying the source of your down payment funds. If you don’t have the funds yourself, you can accept it as a gift from a loved one, as long as you disclose this information at the time of application. But gift money for down payments comes with restrictions, so it’s important to check into those before going that route.

Any gift money given to you for your down payment must be verifiable, which means your lender has to be able to call up the giver for acknowledgment that the funds were a gift and not a loan. You’ll also be asked to provide a formal gift letter at the time of application. Gifts can come from a variety of sources, including family, friends, charitable organizations, government agencies or your employer.

In addition to ensuring you’ll have mortgage reserves after closing to handle any issues, your lender will want to make sure you’ll have the income to cover your monthly mortgage payment. Under the Truth in Lending Act, lenders must “make a reasonable, good faith determination” of your ability to repay the loan. This includes contacting your employer to verify your employment.

A large part of your approval rests on something called your debt-to-income ratio, which looks at the percentage of your monthly income that must go toward paying your debts. In addition to asset verification, mortgage companies will use the information you’ve provided on your monthly debts and the income you demonstrate through paystubs to determine this ratio. Your debts will ideally make up less than 43 percent of your income, but you may be able to go higher if you can demonstrate ability to repay in other areas.

During the process of asset verification, mortgage companies aren’t only looking at the amount of money and nature of deposits in your various accounts. If you have instances of overdrafts during the two months of bank account information you provide, your mortgage lender may see reason for concern. However, this doesn’t mean you’ll automatically be denied.

Lenders are allowed to use their discretion in situations like this. If your credit score is strong and your debt-to-income ratio is low, provide an explanation for the situation and don’t sweat it too much. However, if your account shows a pattern of overdrafts, or your credit score is blanketed in dings for late payments, you may be looking at a denial.