What Do Mortgage See When They Look at You? (Part 3)
BY: CARL TRAWICK
In our third and final look at what mortgage lenders consider when they examine your loan application, we will talk about liquid assets. No, we’re not talking about the full tank of gas you have in your car, nor is this about your well stocked liquor cabinet. We’re talking cash in the bank, savings accounts, money market accounts, certificates of deposit, mutual funds, brokerage accounts, IRA’s and 401K’s (I know IRAs and 401Ks aren’t supposed to be liquid; I’ll get to that).
Generally, lenders are looking at the liquid assets you will still have available to you after you complete the transaction at hand and have made your down payment and paid all associated costs. Incredibly, at least to me, most types of loans require very limited “reserves”, which is what lenders call liquid assets still on hand after a transaction is completed. However, many applications that are denied because of a persons overall financial picture would be approved for a person with significant reserves. First of all, it shows an ability to save money over and above normal living expenses, and it is a cushion that will keep you going for a while in the event of job loss, etc. This is also why IRA’s and 401K’s make an application looks stronger; even though they are for retirement, lenders know you could get cash out of them before you started missing payments.
Loans used for investment properties and second homes generally have much higher reserve requirements than those for primary residences.
Unfortunately, liquid assets do not include your car, even if it is free and clear, your boat, your furniture, your gun collection, your baseball card collection, and, believe it or not, cash, if it isn’t in the bank. Yes, they have cash value to you because you know you could sell them, but underwriters don’t care about them because ownership and actual value are hard to verify. There is one exception to this: you can borrow money against an asset such as a car, and you can use this money in the transaction or keep it as reserves, but remember the payments on the loan will be counted in your debt ratio (see previous article). Consult your mortgage person before implementing this strategy.
So that’s it for our series on “What Mortgage Lenders See When They Look At You”. To summarize, remember: A lender will gladly hand you an umbrella…unless it’s raining.
