When you apply for a mortgage, the lender will assess your overall risk as a borrower. Part of that risk involves your income, credit score, and debt-to-income ratio. But, your assets also play an important role in loan approval and terms. As such, we’ll use this article to discuss the types of assets to include on your mortgage application.
Specifically, we’ll discuss the following:
- Why Assets Matter on a Mortgage Application
- Assets to Include on Your Mortgage Application
- What Assets Do Lenders Consider Most Important?
- Final Thoughts
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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, that is, 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:
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, you find net worth by adding up everything you own and subtracting any debt you have. For instance, if you have $10,000 in cash, $50,000 in a retirement account, and a home worth $300,000, you have assets of $360,000. Now, say you also have a $200,000 mortgage on that home and $5,000 in credit card debt. That means you have $205,000 in total debt for a net worth of $255,000 ($360,000 in assets – $205,000 in debt).
To lenders, the larger your net worth, the more reliable you are as a borrower. If someone worth $1,000,000 loses a job, he or she can likely sell some assets to continue making mortgage payments. Conversely, someone worth only $10,000 will likely struggle to sell enough assets to cover loan payments in the event of a job loss. For this reason, lenders want to see assets on your mortgage application. The more assets you have, the less risky you appear to a lender.
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 the below does not represent an all-inclusive list, these are the most commonly included asset classes to include 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
More and more mortgage applicants hold some level of cryptocurrency. Bitcoin is the most common, but plenty of other types exist. But, do banks consider these assets? It depends. Currently, most lenders do not consider cryptocurrencies as assets in their current form. Due to their extreme price volatility, most lenders simply don’t view them as reliable enough to include in a mortgage application. But, if you need to increase your required assets, you can sell your cryptocurrency holdings.
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.
A Note on 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. Cryptocurrencies will likely need to be converted to cash, with lenders seeing an account statement reflecting that cash balance. 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 both 1) mortgage application approval, and 2) more advantageous loan terms.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
