How Liabilities Figure in the Mortgage Process

As much as assets, lenders are concerned about liabilities during the mortgage process.

There are several types of liabilities, including revolving and installment debt, as well as collections, liens and judgments.

Revolving and installment debt

Revolving debt refers to debt on which you make payments monthly, such as credit cards and home equity lines of credit; both the balance and the payment fluctuate. A good rule of thumb is to keep the balance on all revolving debt within a 20-30 percent range of your limit. Any higher, and they may have an impact on your credit score.

Installment liabilities are those where you make the same payment each month, such as a car loan. At some point, the balance will be paid off.

Installment debt can be excluded from debt ratios when there are fewer than ten payments left, as long as it isn’t paid down specifically for this purpose. This can be extremely helpful when you are qualifying for a home, because the $200 to $300 per month or more you pay monthly in installments may make a huge difference in debt ratios.

Collections, liens and judgments

Collections, especially those that are older and have lower balances, may or may not need to be paid off prior to closing; they may lower your credit score in the short term. Judgments may be able to remain in place as long as you can prove that you have been making payments consistently for at least 12 months, otherwise they will need to be paid in full.

Liens, specifically tax liens, must be addressed. These are particularly problematic for borrowers, because in the liability hierarchy they take priority over even mortgage debt, and must be satisfied in the event of a mortgage default.

Lenders want nothing to do with them and want them gone before they will lend you money.

How your Assets Figure in the Mortgage Process

Many home buyers know that their assets are good sources of a down payment, but do you know assets play other key roles in the mortgage process?

Assets are liquid funds that borrowers can put down on a property and use as closing costs, but also to show as reserves to satisfy lender requirements.

Conventional mortgages require that borrowers have, in addition to their down payments and closing costs, the two-month equivalent of a full-house payment, including taxes and insurance. On the other hand, Federal Housing Administration and Veterans Affairs mortgages have no reserve requirements beyond what is required to close the transaction.

Sources of assets include funds from checking and savings accounts. Funds from retirement plans may be used, but often they must be withdrawn from the plan during the verification process to prove to the lender that those funds are available; many retirement plans have restrictions on withdrawal terms.

Asset history must be documented for 60 days. All non-payroll deposits made in that time period must be able to be supported by documentation, including bank copies of the full deposit after it’s been processed, and possibly letters of explanation as to where funds come from.

Financial gifts from close family members may be used, but the gift giver must supply documentation to prove that he or she can provide the funds. Sellers also may provide credits to the borrower for the purpose of assisting them with closing costs or reserves, but they can’t provide down payment funds.