Assets to Include on Your Mortgage Application

When you apply for a mortgage, lenders evaluate your overall financial profile to determine how risky you are as a borrower. Most people focus on income, credit score and debt-to-income ratio, but your assets are just as important in the decision-making process.

In this guide, we’ll explain why assets matter on a mortgage application, which types of assets you should include, how lenders verify them and which ones tend to carry the most weight during underwriting.

Why Assets Matter on a Mortgage Application

With mortgage applications, lenders have one overarching goal: assess your risk as a borrower. In other words, how likely are you to stop repaying your mortgage and default on the loan? The less risk you pose as a borrower, the more likely a lender will approve your mortgage application. Additionally, lower risk typically leads to better terms (e.g. lower interest rates and down payment requirements).

To assess a borrower’s risk, lenders look closely at three factors:

• Income
• Credit Score
• Debt-to-Income Ratio

However, while not as commonly discussed, lenders also closely assess a fourth financial metric during mortgage applications: your net worth.

In accounting terms, net worth equals the difference between your assets and liabilities. In simple terms, your net worth is everything you own minus everything you owe.

For example, if you have $10,000 in cash, $50,000 in a retirement account and a home worth $300,000, your total assets equal $360,000. If you owe $200,000 on your mortgage and $5,000 in credit card debt, your total liabilities equal $205,000. That leaves you with a net worth of $155,000.

The higher your net worth, the more financial flexibility you have. If you lose your job, substantial assets can help you continue making mortgage payments. Borrowers with limited assets may struggle to stay current during financial hardship. That is why lenders look closely at what you own, not just what you earn.

Assets to Include on Your Mortgage Application

After discussing the importance of reporting assets on your mortgage application, the question remains: what assets should I actually include? While this is not an exhaustive list, these are the most common asset types reported on mortgage applications.

Note: You’ll report traditional income (e.g. wages, salaries, and self-employment income) separately from assets on your mortgage application.

Cash & Cash Equivalents

As the name suggests, these assets include all of your accounts holding cash (e.g. checking and savings accounts). Additionally, cash equivalents represent assets that, though not currently in cash form, can be quickly converted to cash. For example, certificates of deposit (CDs) and money market funds typically qualify as cash equivalents.

Liquid Assets

Liquidity measures how quickly an asset can be converted to cash. A home, for instance, usually takes a while to sell, so it is considered illiquid. On the other hand, publicly-traded stocks, bonds, mutual funds, and exchange-traded funds (ETFs) can all be quickly sold to convert into cash.

Of note, the value of cash and cash equivalents remains steady (ignoring inflation), making those assets more reliable. Conversely, liquid assets tend to fluctuate in value more frequently, meaning a lender may not consider 100% of the current value of your liquid assets on a mortgage application.

Retirement Accounts

Borrowers should also include assets held in retirement accounts (e.g. IRAs, 401k plans, and TSPs) on their mortgage applications. Most people hold liquid assets in these accounts, meaning they can quickly convert them to cash. However, for borrowers younger than retirement age, tapping into these funds can also incur significant taxes and penalties. As a result, cashing out these accounts to make mortgage payments shouldn’t be your primary option. But, for lenders, these assets do represent an option for borrowers, so reporting them further decreases your risk.

Crypto/Bitcoin

Do lenders consider cryptocurrency an asset? It depends. Most lenders do not accept crypto in its current form due to price volatility. However, if you sell your holdings and convert them to cash, lenders can count those funds toward your assets.

For instance, say you hold Bitcoin currently valued at $50,000. If you sell these holdings and convert them to cash, lenders will recognize the cash as an asset towards your net worth. Then, if you so desire, you can repurchase your holdings at the new value after you close on your mortgage.

Note: These sales can trigger capital gains taxes, so be sure to consult with a tax professional before selling any cryptocurrency.

Other Real Estate

Next, banks will want to know about other real estate you own (e.g. a vacation home or rental properties). Unlike stocks and bonds, these assets cannot be quickly sold to cover mortgage payments. But, if you own additional real estate, you could realistically sell it to stay current on your loan.

Furthermore, showing other real estate on your asset list provides an ancillary benefit: it means you’ve proven yourself a reliable borrower with other mortgages. This will indirectly reflect on your credit score, but it also helps to demonstrate to lenders that you have successfully closed on and stayed current on another mortgage.

Equity in a Privately Held Company

Lastly, you’ll want to disclose any ownership, or equity, you hold in a privately held company (i.e. a company that doesn’t trade shares on a public stock exchange). Due to their private nature, selling these equity stakes can be very challenging, if not outright forbidden by corporate agreements. But, this equity represents an asset nonetheless. And, in a worst-case scenario, borrowers could potentially find ways to convert this equity into cash to make mortgage payments.

What to Expect During Asset Verification

When borrowers complete their initial mortgage application, they’ll self-report all of the above assets. During the loan underwriting process, lenders will need to actually verify these assets.

For cash, liquid assets, and retirement accounts this will typically entail submitting your most recent account statements. Many lenders require cryptocurrency to be converted to cash prior to closing. Real estate verification normally includes a deed of title and associated mortgage review. Finally, verifying stakes in privately held companies will vary depending on company type. You can expect banks to ask for business operating agreements, shareholder certificates, corporate charters, or any other documentation they deem necessary to verify your ownership.

What Assets Do Lenders Consider Most Important?

Generally speaking, lenders rank assets from most to least liquid. That is, cash and cash equivalents are the most important, as borrowers can most easily use these funds to make mortgage payments. In a difficult situation (e.g. medical emergency, job loss, etc.), you could quickly tap these accounts to stay current on your loan.

As you move down the above list towards less liquid assets, lenders will likely assign less weight. Due to their nature, illiquid assets prove more difficult to use in a bind. While borrowers can sell a vacation home to cover mortgage payments on a primary residence, it could potentially take an extended period of time.

Final Thoughts

Regardless of how a lender measures individual assets, borrowers should view reporting these items as a more-is-better process. Generally speaking, the more assets you have, the larger your net worth. And, the larger your net worth, the lower your risk to a lender – regardless of what types of assets comprise the bulk of that net worth. This lower risk increases your chances of mortgage application approval and more advantageous loan terms.

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