Are you planning on applying for a mortgage, and you’re not sure if you qualify? There are hundreds of mortgage programs in the United States, each having different sets of requirements. But one of many standard criteria they have is that borrowers need to prove that their net worth is enough. So, in this article, we talk about what “proof” you can show your lender as you apply for a mortgage.
Why Are Assets Important?
Breaking it down, assets are basically things that give you money (cash-in), while liabilities are things that take money away from you (cash out).
Together with your liabilities, assets inform your lender how much money you really have. If the sum of your assets is $24,000, but your liabilities add up to $18,000, in reality, your net worth is only $6,000. This means that you have $6,000 that you can use to pay your loan if your other sources of income (e.g. job) fall through.
A stable, high-paying job doesn’t guarantee mortgage approval. Some people are drowned in debt and still live from paycheck to paycheck. This means that when an emergency arises, they will be in a tough situation — including not being able to pay the mortgage. And lenders don’t want that. Therefore, you don’t only need to have assets, but you need to make sure that the total value of your assets is greater than the full value of your liabilities.
Are Assets Similar to Collateral?
Assets can be used as collateral, but they don’t automatically become one. It depends on your loan type — secured or unsecured. Secured loans require collateral, while unsecured loans are those that don’t require collateral. Most mortgage lenders don’t look for collateral since the house you’re buying can already serve as one. Meaning, if you fail to pay your premiums on time for a certain period of time, your mortgage may default, and your lender may have the right to foreclose your property.
What Do Lenders Consider as Assets?
Anything that has value and can be sold is considered an asset. You can contact an appraiser if you’re unsure about your asset’s value. In some cases, lenders will require a recent appraisal report for certain assets, so you must prepare.
Here are things you can include in your asset inventory:
Cash and Cash Equivalents
This includes all your money deposited in the bank. If you have multiple bank accounts, add all of them to know your total cash count. If you also have time deposits and certificates of deposit in the bank, you can calculate their value upon maturity and write that on your mortgage application form.
Residential and commercial spaces that you personally own are high-value assets. This includes your primary residence, properties you’ve turned into a rental, and other real estates that you’re not using. As long as your name is in the property’s title, you can list it as a personal asset.
Financial advisers would say that cars for personal use are not assets. Instead, they are liabilities unless you turn them into a rental as well (e.g. Uber, Lyft, etc.). However, since you can sell a car, technically, it is an asset once you’re able to sell it. In addition, used cars can also appreciate in value depending on the market situation.
The same goes with boats. You can sell them and earn from them. Take note, though, that not all real estate, cars, and boats will be considered by the lender. If your property, car, or boat has no value anymore (meaning it’s unusable, uninhabitable, and beyond repair), it will not be recognized as an asset since you’ll have difficulty selling them.
Paintings, sculptures, and other crafted designs can be expensive, especially when prominent artists have created them. Some artworks even appreciate over time, hence, are considered assets. If you have some artwork you’ve inherited, or you’ve bought, have it appraised first because the lender will look for proof of its value.
Furniture and Antiques
You might be wondering why these two are assets when you can buy them in cheap antique shops. Well, there are antiques with great historical value — the type of stuff you can display in a museum or a private collector’s display. If you think you have one, have it certified and appraised before going to the lender.
Lenders recognize High-value pieces of jewellery. If you inherited an heirloom that has since appreciated over time, you could have it appraised again at a jewellery shop. Some jewellery can serve as stand-alone collateral for large loans, so list that down in your inventory if you think you have one.
401 (K) and IRA
If you’ve been contributing to your 401 (K), you are legally allowed to borrow money from it to buy a house. However, be careful with this. Withdrawing from your retirement account isn’t always the best option.
Like your 401 (K), your IRA is also a retirement fund. You can withdraw from your IRA anytime. But take note that if you’re below 59 ½ years old, there’s a 10% penalty for every withdrawal. If your 401 (K) and IRA’s value have already appreciated considerably, your lender might acknowledge this as a valuable asset.
Royalties, Stocks, Mutual Funds, Bonds and Securities
All these tradeable assets appreciate and depreciate over time. Typically, the longer you invest in them, the higher will the value become. Therefore, these are considered assets.
Find a great home today with the mortgage you are qualified for. If you need help with this, contact us at HomeSold GA. We take the load off of you and help you find and buy a home in Georgia. You can reach us at 770-668-4888.