In order to prequalify for a mortgage, your lender will first make sure you have enough money or assets on hand to cover the monthly payments for a specified period of time. In other words, you must have adequate liquid reserves left over after you’ve made your down payment, paid all closing fees, and signed all the necessary documents with your mortgage lender.
What Types of Assets Qualify as Liquid Reserves?
Basically, liquid assets include cash or assets that you can easily convert into cash. For the purpose of securing a home loan, mortgage brokers will calculate all of your liquid or near-liquid assets to determine whether you qualify for the reserve requirements. Specifically, they will look at the following items:
- Cash held in checking or savings account
- Cash held in money market funds, certificates of deposit, or trust accounts
- Money invested in stocks, bonds, or mutual funds
- Money vested in a 401(k) account, IRA, or other retirement savings account
- The cash value of a vested life insurance policy
What happens if you don’t have enough assets to cover the required amount? In many cases, lenders will allow you to supplement your reserves with additional funds, such as gifts (but not loans) from family.
The Importance of Seasoning Your Assets
Ever since the mortgage meltdown that led to the housing crisis, banks and lenders have become choosier when it comes to borrowers and more exacting when it comes to requirements. These days, your lender not only wants to know that you have sufficient reserves; they also want to know where your money came from and how long you’ve had it.
In other words, some lenders will demand that your assets be “seasoned” and “sourced.” That means you must be able to:
- Prove that you’ve had the assets in your accounts for at least 2 to 3 months.
- Document how you got the funds.
Basically, the mortgage company doesn’t want you transferring money at the last minute in order to pad your account; they want to know that you’re in the habit of saving and will continue to do so throughout the term of the loan.
What Types of Assets Do Not Qualify as Liquid Reserves?
Unfortunately, not all assets qualify as liquid reserves. The following holdings, for example, will definitely not help you secure a home loan:
- Funds you do not have access to, or that have not been “vested”
- Funds you are only able to withdraw in the event of retirement, death, or employment termination
- Certain types of stock, such as securities held in unlisted corporations, non-vested stock options, or non-vested restricted stocks
- Unsecured personal loans
- Interested party contributions
- Money you’ve received from a cash-out refinance on the property you are trying to mortgage
Assets You Need to Prequalify for a Mortgage
You’ll need enough liquid assets to cover your monthly payments for a specified period of time. That means you must have sufficient funds to pay the principal, interest, taxes, and insurance fees for at least a few months (typically 2 to 6 months). The exact amount you’ll need depends on a number of factors, such as the:
- Particular mortgage lender
- Nature and amount of the transaction
- Occupancy status of the property
- Number of units in the property
- Number of other mortgages you hold
While many mortgage providers ask for only a few months of reserves, it is a good idea to have at least 6 months on hand. Even in cases where there are no reserve minimums, having a sufficient number of liquid assets can sometimes improve your standing and convince your lender to draft better terms.
What if You’re Applying for a Second Mortgage?
What if you’re applying for mortgages on two separate properties simultaneously? The good news is that you can use the same assets to qualify for both loans. That means that if your mortgage company requires $5,000 in reserves for property A and $10,000 in reserves for property B, you will not need to prove that you have $15,000 worth of liquid reserves, but only the amount demanded by each application.
Get Online Mortgage Pre-Approval
Have questions about liquid reserve requirements? Need expert advice on whether you qualify for a home loan? Call A and N Mortgage at (773) 305-LOAN for a free quote. If you’re ready to start the process, we make it easier than ever to prequalify for a mortgage. Simply fill out our online mortgage application to get started.