When you apply for a mortgage, a lender looks at a few key factors including your credit score, income, and assets. As far as the money you have, they want to know two things – do you have enough money to put down on the home and do you have enough money to serve as mortgage reserves?
The Down Payment and Closing Costs
Your down payment and closing costs are two of the most important factors in getting the loan. The lender needs to determine if you have the liquid funds to put down on the home and cover the closing costs. They figure the down payment based on the amount you stated you would put down in the purchase contract. The lender can then estimate the closing costs based on the Loan Estimate they provide you.
The Required Reserves
Once you have the down payment figured out, the lender will determine how much money you have left for reserves. This is money you can use as a ‘backup’ should your income fall through at some point. These are liquid assets that you have on hand that can be used instantly.
Not all mortgage programs require reserves. It depends on the program you choose and your qualifying factors. The typical conventional or government-backed loan doesn’t require reserves. It’s usually the loans that are above the national conforming limit of $453,100 or mortgages on a second property or investment home that require reserves.
Sometimes, though, reserves can serve as a compensating factor. For example, let’s say your debt ratio is close to the maximum allowed for the program. The lender is on the fence about approving you for the loan. They ask you if you have any compensating factors. Reserves are a great one because it shows another method of paying the loan should something happen. A lender will measure your reserves based on the number of mortgage payments you can make with it. For example, if your mortgage payment is $1,000 and you have $10,000, you have 10 months of reserves.
What are Liquid Assets?
It may help to understand what liquid assets are so that you know what lenders will want to see. Cash is obviously the most liquid asset, but since lenders don’t count cash since you cannot verify it, you’ll need to prove any of the following accounts:
- Money market accounts
- Mutual funds
Basically, liquid assets are anything you can turn into cash quickly. For example, you can sell your stocks and take the cash right away. You can even cash in on a CD prematurely and take the cash, minus the penalty for taking the cash early.
How Much do you Need?
How much money you need for a home loan really depends on your circumstances. At the very least, you’ll need enough to cover the down payment and closing costs. Unless you are able to secure gift money from a relative or employer, you have to cover those costs.
Beyond those costs, the reserves are a compensating factor. They usually aren’t required, but they cannot hurt your chances of approval. If you have qualifying factors that are close to the borderline of being approved or denied, having reserves can help. It’s just another way to convince a lender to approve your loan. So how much you need really depends on how badly you need a compensating factor.
In short, you can’t ever have too many assets. The more you have, the better your chances of approval. It’s in your best interest to gather the proof of the money that you have and provide it to the lender with your other qualifying documents to help ensure that you get the loan that you need.