Written By: Hina Habib
Assets are one of the essential conditions of underwriting. There are two major types of assets, liquid assets and non-liquid assets. Both are equally important when a file is underwritten, comparing with old times, where underwriters had to make final determination for the required assets, it is more easier nowadays when automated system makes all the determinations.
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Most common assets include checking, savings, CD, Bonds, stocks and retirements accounts. Assets show stability for the borrower and gives confidence to the lending institution to grant more loans. It also provides a trend for the borrower’s saving ability. Therefore, lenders know that in worse circumstances of employment instability, a borrower will be able to continue his mortgage payments.
LIQUID ASSETS
By liquid assets we mean, if required can be used right away. This category includes checking accounts, savings accounts, and gift funds and in some cases CD accounts. Normally, liquid assets are required for transactions where a borrower requires funds for closing. Liquid assets in a borrower’s account need to be seasoned for, at least two months; otherwise an explanation is required with documentary proof for the large deposit. A borrower needs to prove that he/she has required funds for closing plus 2 to 6 month reserves (depending on the approval requirement) in his bank account. This requirement is sometimes satisfied through gift funds if a borrower is short in funds for closing. Gift funds can be used for closing but not for reserves. For reserves a borrower has to have his own funds, which could be non-liquid assets too.
NON-LIQUID ASSETS
Examples for non-liquid assets are mutual funds, retirement, 401K, stocks and bonds. These assets can be used for both closing and reserves. If used for reserves, the borrower can only use 60% to 70% of the value. If the borrower does not have enough liquid funds for closing then he /she requires liquidation of these assets before the closing. Assets mentioned above can only be used if they can be liquidated. Underwriting cannot use these funds for reserves if the borrower is not able to liquidate these funds. Due to this reason, the underwriter has to always see the terms and conditions for liquidation. On the other hand, if a borrower is using his or her 401k for closing costs and/or down payment, then he or she is not required to provide terms and conditions for the liquidation of those accounts.
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Before submitting the file to underwriting, it is very important for a loan officer or processor to closely review the bank statements and address all deposits which are unusual. On refinances, a borrower does not require funds for closing; therefore, in that case, providing explanation for any large and/or unusual deposits is good. If the transaction is a purchase then each deposit needs explanation and documentary proof for the deposit. If documentary proof is not available then that amount of assets is not used as verified assets for closing. If there is a deposit of a gift funds then a gift letter is required with donor's ability and a copy of the check.
There is another kind of asset called gift of equity, which is given normally by the seller. It requires all the due diligence and can only be used if it qualifies with required Fannie and Freddie guidelines.
About The Author
Hina Habib - As an NAMP® staff writer, Hina Habib has been working as a Loan Processor with mortgage industry for more than 15 years now. Hina is a loan processing instructor for Loan Processor University (www.LoanProcessorTraining.org). She has ample experience of structuring and processing FHA, VA and Conventional loans. She worked with an established Correspondent Lender/ Mortgage Broker for 13 years. After her promotion as a Senior Loan Processor she trained loan officers and other processors. Currently she is working with a strong and established banking institute as a Mortgage Processor II. She is very well informed with the current on going changes in the mortgage history and can help answer your questions more accurately. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
