Understanding Mortgage Applications: Counting Your Assets

When applying for a mortgage, lenders will assess your financial health to determine your eligibility. They will look at your credit score, total monthly debt, total monthly income, and overall net worth. Assets are one factor that lenders consider when approving a mortgage application, but it's not the only thing they look at. Lenders also want to see proof of income and a low debt-to-income ratio. Assets demonstrate your financial stability and ability to repay the loan. They are usually grouped into three categories: cash, cash equivalents, and property. When listing your assets, it's best to provide accurate values and supporting documentation.

Lenders want to see proof of income and a low debt-to-income ratio

When applying for a mortgage, lenders will want to see proof of your income and a low debt-to-income (DTI) ratio. This is because they need to confirm that you make enough money to repay the loan. Lenders will also want to know that you can handle the anticipated mortgage payment while keeping up with other monthly payments.

To calculate your DTI, you need to divide your monthly income before taxes by your monthly debt payments. This includes all your monthly debt obligations, such as credit card balances, car payments, and other loans. The lower the DTI, the less your income is being used for debt payments. As a general rule, many mortgage lenders prefer that homebuyers have a DTI of less than 36%, with the mortgage accounting for no more than 28% of their income.

Lenders will ask for proof of income documentation, such as pay stubs, tax return documents, and bank statements. They may also ask for additional information to determine your ability to repay a loan. For example, if you are taking out a loan to buy a car, the lender will want to know that you can make the car loan payments on top of your other debt payments and living expenses.

It is important to provide full and accurate proof of income information to a mortgage lender, as this can result in a smoother loan funding process. Lenders will also want to see a comprehensive list of your assets, such as money in checking and savings accounts, investment accounts, and properties. This information will help them assess your financial health and determine your eligibility for a mortgage.

Assets demonstrate financial stability and ability to repay the loan

When applying for a mortgage, it is essential to provide a comprehensive list of your assets. Assets are items of monetary value that you own, and they can be used to demonstrate your financial stability and ability to repay the loan. Lenders will consider your assets to assess your financial health and determine your eligibility for a mortgage.

Assets can be categorised into three main types: cash, cash equivalents, and property. Cash assets include money in checking accounts, savings accounts, and money market accounts. Cash equivalents refer to assets that can be quickly converted into cash, such as investment accounts, stocks, bonds, and mutual funds. Property assets include any other real estate you own, such as investment properties or vacation homes, as well as vehicles and valuable items like art, antiques, or jewellery.

When listing your assets, it is crucial to provide accurate values and supporting documentation. Lenders will typically request recent bank statements for your checking and savings accounts, covering the last two to three months. They may also ask for statements for investment accounts, retirement accounts, and documentation for any other properties or valuable items you own. By providing this information, you can demonstrate your financial stability and show that you have the ability to repay the loan, even in the event of unforeseen circumstances such as a job loss.

Additionally, lenders may inquire about the source of any cash deposits to ensure that you have sufficient funds for the down payment and monthly mortgage payments. It is worth noting that assets are not the only factor considered in a mortgage application. Lenders also evaluate your income, debt-to-income ratio, credit score, and equity in the home. However, providing a detailed and accurate list of your assets can improve your chances of mortgage approval and may even help you qualify for a better interest rate.

Lenders prioritise liquid net worth over total net worth

When applying for a mortgage, it is essential to provide a comprehensive list of your assets. Lenders use this information to assess your financial health and determine your eligibility for a mortgage. This includes money in checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs). It is also necessary to list all investment accounts, such as brokerage accounts, IRAs, 401(k)s, stocks, bonds, mutual funds, and other securities.

Lenders consider your net worth to understand how you will make your mortgage payments, including the down payment and closing costs. They also want to assess if you can continue to make payments if you lose your job. While your total net worth is essential, lenders tend to prioritise liquid net worth. Liquid net worth is a subset of your overall net worth and considers cash and other holdings that can quickly become cash, minus what you owe. It is a valuable metric for determining the health of your financial safety net and your ability to handle regular and short-term financial needs.

Liquid assets are easy to access and sell and are not subject to a sudden loss in value if converted to cash. Examples of liquid assets include money in checking and savings accounts, money market accounts, and brokerage accounts. On the other hand, retirement accounts, real estate, and certain investments are typically excluded from liquid net worth calculations as they cannot be easily withdrawn or converted to cash.

Lenders prioritise liquid net worth because it represents the wealth you can access immediately. While your overall net worth is a measure of your long-term financial success, liquid net worth is a more immediate snapshot of your financial preparedness. This distinction is crucial because, in the short term, you cannot rely on your home equity or retirement contributions for living expenses. Therefore, when assessing your mortgage application, lenders will focus on your liquid net worth to determine your ability to handle regular and short-term financial needs.

Lenders will want to see bank statements for your checking, savings, and other deposit accounts

Lenders will also want to see proof of other assets, such as investment accounts, retirement accounts, and valuable items. These assets demonstrate your financial stability and ability to repay the loan. They also help lenders determine how you would make your payments if you lost your job. It's important to provide accurate values and supporting documentation for all your assets.

In addition to your assets, lenders will also consider your income, debt-to-income ratio, credit score, and total monthly debt when assessing your mortgage application. They will use this information to calculate your net worth and determine your eligibility for a mortgage.

It's worth noting that some lenders may require evidence of enough liquid assets to cover a certain number of months of expenses, typically six months' worth. This is known as the PITI requirement and includes principal, interest, taxes, and insurance. However, this may vary depending on the lender and loan type.

Lenders will also take into account the value of any properties, vehicles, and valuable items you own

When applying for a mortgage, it is essential to provide a comprehensive list of your assets. Lenders use this information to assess your financial health and determine your eligibility for a mortgage. This includes the value of any properties, vehicles, and valuable items you own.

Properties, whether they are investment properties or vacation homes, should be listed on your application, along with their estimated value. Documents such as recent appraisals, tax assessments, or sales contracts can be used to demonstrate the value of these properties.

Vehicles are also considered assets and can be included in your application, even though they are not typically highly liquid. If you own valuable items like art, antiques, jewellery, or collectibles, you can include their estimated value as well. These items demonstrate your financial stability and ability to repay the loan.

Lenders will also consider your net worth, which is calculated by subtracting all the debts you owe from your total assets. This gives them insight into your financial situation and how much money you actually have. They may also prioritize your liquid net worth (total cash and cash equivalents minus outstanding debt) to understand the source of your down payment and closing costs.

It is important to provide accurate values and supporting documentation for all your assets. Lenders will verify the information you provide and may ask for recent bank statements, investment account statements, and documentation for other valuable items.

Frequently asked questions