Chapter 7: Assets and Reserves


Overview

Assets and reserves are essential in the mortgage underwriting process, providing the lender with confidence that the borrower has the financial means to close the transaction and cover future mortgage payments. This chapter delves deep into asset types, documentation requirements, verification procedures, reserve calculations, and underwriting guidelines.

Section 1: Understanding Assets in Mortgage Underwriting

1.1 Purpose of Asset Review

  • To ensure borrower has sufficient funds for:
    • Down payment
    • Closing costs
    • Prepaid items (taxes, insurance)
    • Required reserves
  • To identify any large or unusual deposits
  • To verify that assets are borrower-owned and not borrowed funds (unless disclosed and allowed)

1.2 Asset Documentation Standards

  • Two months of consecutive account statements
  • All pages must be included (even if blank)
  • Must show:
    • Account holder name
    • Account number
    • Financial institution
    • Balance history
    • Transaction details

Section 2: Types of Acceptable Assets

2.1 Liquid Assets

  • Checking/Savings Accounts
    • Most commonly used
    • Immediate accessibility
    • Must verify no overdraft activity affecting reserves
  • Money Market Funds
    • Easily liquidated
    • Treated like savings accounts
  • Certificates of Deposit (CDs)
    • Considered acceptable if not subject to early withdrawal penalties
    • Documentation includes current balance and maturity terms
  • Cash on Hand
    • Generally not acceptable unless allowed by specific programs (e.g., FHA)

2.2 Market-Based Investments

  • Stocks, Bonds, and Mutual Funds
    • Current statement showing value
    • Liquidation required for closing funds
    • 70% of balance typically used (30% discount for volatility)
  • Retirement Accounts (IRA, 401(k), etc.)
    • Acceptable with evidence of borrower ownership
    • May need to prove accessibility without penalty
    • 60–70% used depending on investor

2.3 Gift Funds

  • Must be from acceptable donor:
    • Relative (by blood, marriage, legal guardianship)
    • Employer (if allowed by program)
  • Requires:
    • Gift letter (signed by both donor and recipient)
    • Evidence of transfer (bank statements, wire proof)
    • No expectation of repayment

2.4 Grants and Down Payment Assistance (DPA)

  • Allowed per investor/program
  • Must be documented with:
    • Award letter
    • Terms and conditions
    • Source (government, non-profit, employer)

Section 3: Large Deposits and Asset Sourcing

3.1 Large Deposits

  • Defined by investor as greater than 50% of monthly income
  • Must be sourced:
    • Paystub or payroll deposit
    • Gift letter and donor proof
    • Sale of asset (with bill of sale, proof of deposit)

3.2 Unacceptable Sources

  • Cash deposits without documentation
  • Credit card advances
  • Personal loans (unless properly disclosed and repayment included in DTI)

3.3 Asset Transfers

  • If borrower transfers between their own accounts:
    • Document both the withdrawal and deposit
    • Must align with timing and amounts

Section 4: Reserves in Underwriting

4.1 Definition

  • Reserves are liquid or near-liquid assets left over after closing
  • Measured in months of PITI (Principal, Interest, Taxes, Insurance)

4.2 Required Reserves by Loan Type

  • Conventional Loans (Fannie Mae/Freddie Mac)
    • Varies from 2 to 12 months based on:
      • Occupancy type (primary, second home, investment)
      • Number of financed properties
      • DU/LP findings
  • FHA Loans
    • Generally no reserve requirement
    • Manual underwriting may require 1–3 months
  • VA Loans
    • No reserves typically required unless rental income is considered
  • Jumbo/Non-Conforming Loans
    • Often require 6–24 months reserves

4.3 Calculating Reserves

  • Use verified assets post-closing
  • Divide total available funds by monthly PITI
  • Consider lender credit impacts, closing costs, and escrows

Section 5: Asset Analysis Techniques

5.1 Trending Balance Reviews

  • Review average balances over 60 days
  • Look for declining or increasing patterns
  • Identify potential undisclosed debts or financial stress

5.2 Cross-Verification with Credit

  • Match deposits with payroll listed on credit
  • Check asset balances align with reported liabilities

5.3 Identifying Red Flags

  • Frequent overdraft charges
  • Round-number large deposits
  • Statements showing unrelated names or addresses

Section 6: Asset Worksheets and Tools

6.1 FNMA Form 1003 Section VI

  • Assets and liabilities disclosure
  • Borrower lists bank accounts, balances, real estate owned

6.2 DU/LP Automated Tools

  • Asset acceptance varies by system feedback
  • May waive sourcing of large deposits in certain cases

6.3 Underwriter Checklists

  • Verify all statements
  • Cross-reference ownership
  • Ensure sufficient funds to close
  • Document all gifts and transfers

Section 7: Case Studies and Examples

Case 1: Gift from Parent for Down Payment

  • Gift letter completed
  • Statement from parent’s account
  • Proof of wire transfer to borrower
  • Accepted as sourced and eligible

Case 2: Unexplained Large Deposit

  • $10,000 cash deposit with no documentation
  • Considered unacceptable and removed from funds available

Case 3: Multiple Accounts

  • Borrower showed 5 accounts with sufficient funds
  • Two were joint with non-borrowing spouse
  • Documented ownership and confirmed availability

Final Notes

  • Only usable funds should be included in final underwriting review
  • All assets must be seasoned, sourced, and documented
  • Never assume funds without proper paper trail
  • Conservative approach should be followed when in doubt

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