In Part 1 of  our series, we discussed income and the documentation you’ll need for your lender.  You can read Part 1 here: 5 Things to Know Before You Apply for a Mortgage

In Part 2, we’ll discuss documenting your cash assets for the down payment, closing costs, and reserves (the money you have left over after settlement on a real estate purchase.  As we discussed in Part 1, lenders require full documentation of virtually everything these days and it’s to your advantage to be prepared for what the lender is going to request from you.

Organize Your Cash Assets and Know Where Your Down Payment is Coming From:  You will need to document that you have enough liquid, cash assets to make the down payment on the home purchase, pay the closing costs, and have some funds left for reserves after settlement.  Liquid cash assets are funds in checking, savings, and money market accounts with banks, thrifts, and credit unions.  Money market mutual funds are also considered cash assets for this purpose.  Any other assets that you plan to use for your down payment and closing costs will need to be converted into cash prior to settlement.

Your first step is to document for the lender that you have enough assets to close on the loan.  To do this your provide the lender with bank and or brokerage statements showing the funds needed. 

BANK STATEMENTS:

1.  Lenders will typically require 2 months of complete statements (in some instances 1 month will suffice – your loan officer will tell you).

2.  Statements need to be complete, show the name(s) of the account owner(s), the name of the bank, the time period covered, the beginning and end balance, and all transactions.  If the statement says page 1 of 6, then all 6 pages are required even if they do not look important.  The lender does not know that page 6 only contains the grid used to balance your account unless it is included in what the lender is given.

3.  Large deposits typically must be explained and documented with a copy of the deposit slip and check(s).  Large deposits could be the proceeds of undisclosed loans that obligate the borrower (you) to make monthly payments that could hamper your ability to repay the mortgage loan.  It’s OK to borrow funds in many instances (ex. proceeds from a margin loan, home equity line of credit, etc.) but the mortgage lender needs to know this and to could the resulting monthly payment in the qualifying ratios.

4.  Statements should be originals or direct copies or facsimiles of the statements provided by the financial institution.  A simple transaction history printed from a bank’s website typically will not be sufficient.  Almost all financial institutions allow customers to access statement copies online these days.  Downloaded and printed PDF copies of your bank statements are completely acceptable.

RESERVES:

Lenders look to reserves to be assured that a borrower has resources to fall back on in the event of loss of work, illness, etc.  The more reserves a borrower can show, the less risk to the lender that a borrower will be unable to repay the loan in the event of a short term loss of income.  On a vacation or 2nd home mortgage for example, many lenders have minimum reserve requirements – such as 2 months of monthly payments in reserve.  Reserve requirements for investment property mortgages and Jumbo mortgages are even higher.

LIQUIDATION:

When a borrower has sufficient financial assets for the purchase transaction, but not enough assets in cash accounts, the lender will require the documentation of the liquidation of sufficient securities to increase the level of cash assets to equal or exceed the cash needed to close.  For example, someone purchasing a $200,000 home with a 20% down payment in Delaware would need to show enough assets for a $40,000 down payment (20% of $200,000) and approximately $6,000 in closing or settlement costs.  If the purchaser has $30,000 in savings and $50,000 in mutual funds in their brokerage account, the lender would require documentation that at least $16,000 in mutual funds had been liquidated and available in cash ($46,000 cash needed minus $30,000 in liquid cash in the savings account).  Therefore, the borrower would need to sell $16,000 of the mutual funds to meet this requirement.  This would be documented with a copy of an updated mutual statements showing the sale of the mutual funds and the $16,000 in the cash portion of the account, or by providing copies of the sell transactions and an updated account balance from the brokerage showing the $16,000 in cash.

SUMMARY:

It’s always a good idea to discuss the source of funds for down payment and closing costs with your loan officer at the time of application so that you can be advised about specific documentation and timing requirements.  You’ll want to begin accumulating funds in your cash account for settlement sooner rather than later and your lender will want all documentation completed at least 1 week prior to settlement – earlier if possible.

If you are planning to borrower funds for the down payment or get a gift from a relative, this needs to be disclosed at the time of application so that any special documentation requirements can be outlined and obtained early on in the process.  With a gift for example, you will need to show the donor’s ability to give the gift and to track the actual transfer and receipt of the gift funds.

I hope this information has been helpful.  Documenting assets, large deposits, securities liquidation and gift transfers can be one of the most time consuming portions of the mortgage process.  It’s better to be prepared and start early.

Please give me a call in the office at 302-537-5076 with any questions, post a comment below, or hit me up on Twitter or my FaceBook page if you need more information.

You can read Part 1 of this blog series here: 5 Things to Know Before You Apply for a Mortgage