Know the Difference Between Assets and Liabilities
When you start work on your loan application you begin to notice the application is fairly wide reaching. There are a lot of questions directed at balancing out your assets and liabilities. Your lender will also want to know your name and where you’ve lived over the past three years. Maybe you’ve had a name change and if so the lender wants to know if you’ve ever been known by any other name. How old are you? Do you have any dependents and if so how old are they? There are many more but you begin to get the picture. The loan application is a multi-page form that covers mostly everything about who you are, your credit history, your employment and income and another area which asks for a list of your assets and liabilities.
Lenders need to balance out assets and liabilities to verify you have enough funds available for a down payment and closing costs. There should be enough assets for what lenders refer to as “cash reserves” which is calculated as how many months of house payments are in the bank. Lenders don’t want to see your bank account be zero after you sign your loan papers. But what are considered assets from a lender’s perspective?
One type of asset comes in the form of liquid cash reserves, primarily a checking or savings account. It’s an “at will” account where funds are immediately available to the account holder. Lenders will verify these reserves by reviewing copies of your bank statements making sure there are sufficient funds to close. To be considered eligible as a cash reserve, the funds must come from a recognized source. For example, if someone gets paid on the 1st and 15th each month, the lender will look at the statements and verify the employment income is being deposited on or about the 1st and 15th each month. If a deposit is shown that is not from a regular source, the borrower must document where the funds came from. Lenders do this because they don’t want the irregular funds coming from a personal loan somewhere which the borrowers will have to pay back later.
Assets can also be attributed to the borrower for funds residing in a retirement account but because they’re not liquid, lenders will only count a portion of such funds as available assets. For retirement accounts such as a 401(k), most lenders will count 50 percent of the balance as cash reserves.
When valuating assets and liabilities, the other side of the ledger is the liabilities. Liabilities are things the borrower owes each month. A credit card payment is a liability and so is an automobile payment. Student loan payments are also a liability. Liabilities are listed both as a total amount owed and a minimum monthly payment required. For a revolving account, the lender will use the minimum amount owed each month when counting up monthly debts. For installment accounts, the listed monthly payment is used however if there are less than 10 payments remaining, the lender ignores the payment knowing the liability will soon disappear.