Module 4: Asset Documents
Asset documents provide evidence of a borrower's financial reserves and help lenders assess the borrower's ability to meet down payment requirements, closing costs, and ongoing mortgage payments.
Bank Statements
Bank statements are financial documents provided by a bank or financial institution that detail the activity and balance of an individual's bank account over a specific period. Here are some key points about bank statements:
Purpose:
Bank statements serve multiple purposes in the mortgage application process:
Verification of Funds: Lenders review bank statements to confirm the availability and legitimacy of funds for the down payment, closing costs, and reserves required for the mortgage.
Income Verification: Bank statements can provide evidence of regular income deposits, such as salary, self-employment earnings, rental income, or other sources.
Expense Analysis: Lenders analyze bank statements to assess the borrower's spending habits and evaluate their ability to manage their finances responsibly.
Statement Period:
Lenders typically request bank statements covering the most recent two to three months. The statement period should be consecutive and reflect the borrower's name, account number, and the bank's name. It's important to provide complete statements, including all pages, even if some pages may appear blank.
Contents of Bank Statements:
Bank statements provide detailed information about the activity and balance of the account. The key elements to review include:
Deposits: Bank statements show the date, source, and amount of all deposits made into the account. It's important for lenders to identify the sources of funds and ensure they are legitimate and consistent with the borrower's stated income.
Withdrawals: Bank statements also indicate the date, payee, and amount of all withdrawals or transactions. Lenders analyze these transactions to assess the borrower's financial responsibilities, such as monthly expenses, debt payments, and other financial obligations.
Ending Balance: The ending balance on each statement shows the remaining funds in the account after accounting for deposits and withdrawals. Lenders use this information to evaluate the borrower's financial stability and the adequacy of their available funds.
Account Ownership:
Bank statements should clearly indicate that the borrower is the account holder. Joint accounts may require additional documentation to establish the ownership and accessibility of funds by the borrower.
Red Flags:
Lenders scrutinize bank statements for any red flags that may raise concerns about the borrower's financial situation. Unusual or irregular transactions, large cash deposits without clear explanations, and overdrafts may require further explanation or documentation.
Gifts
In the context of mortgage lending, a gift refers to funds provided to a borrower that are intended to be used for the down payment, closing costs, or other expenses associated with purchasing a home. Gifts are a common way for borrowers to obtain additional funds to assist with their home purchase. Here are some important points to understand about gifts:
Source of Gift:
Typically, a gift comes from a family member or a close relative, such as parents, grandparents, siblings, or spouses. Some loan programs may have specific requirements regarding the allowable sources of gifts, so it's important to check with the lender or mortgage professional to ensure the gift meets the program's guidelines.
Gift Letter:
When a borrower receives a gift, the donor (the person providing the gift) is usually required to provide a gift letter. The gift letter is a formal document that confirms the funds are a true gift and not a loan that needs to be repaid. The gift letter typically includes the following information:
Donor's Name and Relationship to the Borrower: The letter states the name of the person providing the gift and their relationship to the borrower (e.g., parent, grandparent).
Gift Amount: The letter specifies the amount of the gift, which should match the funds being transferred.
Statement of Gift: The letter should clearly state that the funds are a gift and no repayment is expected.
Donor's Contact Information: The letter includes the donor's contact information, such as their address and phone number.
Borrower's and Donor's Signatures: The gift letter must be signed by both the donor and the borrower to acknowledge and accept the gift.
Documentation:
Lenders typically require documentation to verify the transfer of gift funds from the donor to the borrower. This may include:
Bank Statements: The lender may request the donor's bank statements to show the source of the gifted funds and provide a paper trail of the transaction.
Gift Check or Wire Transfer: The lender may require documentation of the actual transfer of funds, such as a copy of the gift check or wire transfer receipt.
Gift Limitations:
Lenders may have restrictions on the amount of the gift that can be used toward the down payment or closing costs. These limitations vary depending on the loan program and the borrower's financial situation. It's important to check with the lender or mortgage professional to understand any applicable gift limits.
Tax Implications:
Both the donor and the borrower should be aware of any potential tax implications associated with giving or receiving a gift. It's advisable for both parties to consult with a tax professional to understand the specific tax rules and regulations that apply to their situation.
Earnest Money Deposit (EMD)
An Earnest Money Deposit (EMD), also known as a Good Faith Deposit, is a sum of money provided by a buyer to demonstrate their serious intent and commitment to purchasing a property. It is a common practice in real estate transactions, including the homebuying process. Here's what you need to know about Earnest Money Deposits:
Purpose: The primary purpose of an EMD is to show the seller that the buyer is committed to the purchase and has a genuine interest in the property. It gives the seller confidence that the buyer is serious and reduces the likelihood of the buyer backing out of the transaction.
Amount: The amount of the Earnest Money Deposit is typically a percentage of the purchase price, although it can vary depending on local customs and negotiations between the parties. The specific amount is usually stated in the purchase agreement or contract.
Custodian of the Deposit: The EMD is typically held by a neutral third party, such as an escrow agent, attorney, or the real estate brokerage handling the transaction. This ensures that the funds are held securely and in accordance with the agreed-upon terms.
Handling of Funds: The handling of the EMD is subject to the terms specified in the purchase agreement or contract. In the event of a successful transaction, the EMD is typically applied towards the down payment or closing costs. If the transaction falls through due to contingencies or other valid reasons, the EMD is typically returned to the buyer. However, if the buyer breaches the contract without valid cause, the seller may be entitled to keep the EMD as compensation.
Contingencies and EMD: The purchase agreement may outline specific contingencies that allow the buyer to terminate the contract and receive a refund of the EMD. Common contingencies include satisfactory home inspections, financing approval, or the sale of the buyer's existing property. If any contingencies are not met within the specified timeframes, the buyer may have the right to cancel the contract and receive the EMD back.
Risk and Protection: Buyers should be aware that if they fail to meet the obligations outlined in the purchase agreement, they may risk losing the EMD. It is essential to thoroughly review and understand the terms of the purchase agreement, including the conditions under which the EMD may be forfeited.
Local Regulations: EMD practices may vary by location, so it's important to consult with a real estate professional or attorney familiar with the local laws and customs to understand the specific requirements and practices in your area.
Other Assets
In mortgage lending transactions, "other assets" refer to any assets that are not considered traditional forms of income or documentation but can still contribute to a borrower's financial profile and ability to qualify for a mortgage. These assets can help demonstrate financial stability, additional sources of funds, or reserves. Here are some examples of other assets that may be considered in mortgage lending:
Real Estate Holdings: If a borrower owns additional real estate properties, such as rental properties or vacation homes, the value and income generated from these properties can be considered as part of the borrower's financial profile. Lenders may assess the rental income, property value, and associated expenses to evaluate the borrower's overall financial situation.
Vehicles: In some cases, the value of vehicles owned by the borrower can be considered as an additional asset. However, it's important to note that vehicles are typically not a primary consideration in mortgage lending, and their value may be subject to depreciation and market fluctuations.
Stocks, Bonds, and Investments: Lenders may consider the value of stocks, bonds, or other investments owned by the borrower as potential assets. These assets can provide additional reserves or demonstrate the borrower's ability to generate income from investment portfolios.
Retirement Accounts: Retirement accounts, such as 401(k) or Individual Retirement Accounts (IRA), can be considered as assets. The vested amount in these accounts may demonstrate long-term financial stability and the potential for additional reserves.
Valuable Personal Property: Certain valuable personal assets, such as artwork, jewelry, or collectibles, may be considered as other assets. However, their inclusion in the mortgage lending process may be limited, and their value may need to be supported by appraisals or other documentation.
Lenders will typically require documentation and evidence of ownership, value, and income generation associated with these assets.
Reserves
Reserves refer to the amount of funds that a borrower has set aside or saved to cover their future mortgage payments, as well as other related expenses. Lenders often require borrowers to have reserves as a measure of financial stability and to ensure that they can continue making payments even in the event of unexpected financial challenges.
Reserves are typically expressed as a certain number of months' worth of mortgage payments, and they are usually calculated based on the borrower's total housing expenses, including principal, interest, taxes, and insurance (often referred to as PITI). For example, a lender may require a borrower to have three months' worth of reserves, which means the borrower must have enough funds to cover three months of mortgage payments.
Lenders may consider various types of reserves when evaluating a borrower's financial situation. These reserves can include savings in bank accounts, money market funds, certificates of deposit (CDs), or even certain types of retirement accounts. However, lenders may have specific requirements regarding the acceptability of certain types of reserves and may require documentation or proof of availability.
Finicity
Finicity is a financial data aggregator and analytics company that provides access to real-time financial data for individuals and businesses. It specializes in gathering and analyzing financial information from various sources, such as banks, lenders, credit bureaus, and other financial institutions.
Here's how Finicity is involved in mortgage lending:
Account Verification: Finicity's data aggregation platform allows lenders to verify the financial information provided by borrowers during the mortgage application process. By securely accessing and analyzing bank account data, Finicity helps lenders verify income, assets, and liabilities of the borrower. This helps streamline the verification process and reduces the need for manual document submissions.
Transaction Data: Finicity's platform provides access to detailed transaction data from borrowers' bank accounts. This data helps lenders assess the borrower's financial behavior, including income sources, expenses, and overall financial health. Analyzing this data can assist in determining the borrower's ability to afford the mortgage payments and assess their creditworthiness.
Streamlining Underwriting: Finicity's services enable lenders to gather accurate and real-time financial information, reducing the need for manual verification and document collection. This helps streamline the underwriting process, improves efficiency, and reduces the time it takes to evaluate a borrower's application.
Risk Assessment: Through its data analytics capabilities, Finicity helps lenders assess the credit risk associated with a mortgage application. By analyzing financial data, income patterns, and transaction history, Finicity's insights provide lenders with a comprehensive view of a borrower's financial profile, aiding in risk assessment and decision-making.
Enhanced Borrower Experience: Finicity's technology simplifies the mortgage application process for borrowers. By securely connecting to their financial accounts, borrowers can provide accurate and up-to-date financial information, eliminating the need for manual document submissions. This improves the overall borrower experience, making the process more convenient and efficient.
It's important to note that Finicity works with various mortgage lenders, loan origination platforms, and fintech companies to integrate their data services into the mortgage lending ecosystem. The specific utilization and implementation of Finicity's services may vary depending on the lender or loan origination system used.