VI. Assets and Liabilities: This section covers assets, both liquid and non-liquid, and liabilities.  

a. The liquid assets are assets that can be used for closing.  They consist of funds in checking and savings accounts, mutual funds, money market accounts, stocks and bonds, and cash value of life insurance.  These assets can be verified by either a verification of deposit, or copies of statements (all pages of the statements are required).  

b. Non liquid assets include retirement accounts, net worth of business owned, and business accounts.

1) Cash values in retirement accounts generally cannot be used for closing, but can be used for reserves required after closing.  These can be used for closing if they are cashed out (with the tax and penalty being deducted from the total), or borrowed against.  If they are borrowed against, the minimum payment must be included in the total debt ratio.

c. Other assets can be sold or borrowed against for funds for closing.  Proof of sale or loan must be provided.  This includes real estate, automobiles, motor homes, and boats.

d. Liabilities consist of real estate loans, auto loans or leases, student loans, personal loans, and credit card balances. The total amount of the debt, the monthly payment, and the remaining term are all listed in this section. Other liabilities, including alimony and child support payments, tax liens, and judgments must be listed.

1)  Loans that will be paid off in 10 months or less will not impact the debt ratios.  Typically loans and credit card balances can be paid off to assist in qualifying. How much the applicant pays on other liabilities directly impacts their ability to qualify for a mortgage.

e. Real estate owned is treated differently than most assets.  It can be sold or borrowed against to provide funds for closing.  Net rental income (or loss) is determined by subtracting the expenses, including the mortgage payment, taxes, insurance, HOA fees, utilities, and maintenance and repairs from the gross rental income.  If there is no history of rental income, Fannie Mae uses 25% of the gross income as expenses to determine net income.  The mortgage payment is subtracted from the net to arrive at the income (or loss) to use in qualifying.

Why is this important?

Payment history on current or past mortgages is perhaps the most important factor in a lenders decision to grant a new mortgage.  

VII. Details of Transaction: This section covers the financial details of the purchase or refinance.  It lists the purchase price (or the loans to be paid off with a refinance), closing costs, prepaid items, and mortgage insurance premiums to come up with a total cost.  The loan amount, subordinate financing, earnest money, and other credits are subtracted from the total cost to arrive at the cash needed (or available) at closing.

Why is this important?

The loan officer should review this information with the applicant.  The applicant needs to understand the total costs of the transaction including required down payments, closing costs, prepaid items, and other charges and credits.  With proper review, there should be no surprises at closing.

VIII.  Declarations:  Questions are asked of each borrower in the transaction to assist the underwriter in determining the credit worthiness’ of each borrower, including questions about prior bankruptcies, foreclosures, defaulted student loans, alimony or child support obligations, co-signatures on other loans, or borrowing the down payment.  They also ask about citizenship, occupancy, and prior real estate ownership.

Why is this important?

Applicants are required to disclose any information such as bankruptcies, foreclosures, defaulted student loans, and alimony or child support that may adversely affect the ability to repay the loan.  Some mortgage programs have different requirements based on prior home ownership.  Many of the down payment assistance programs are only available for first time buyers.  Some limited doc or no doc loans require prior home ownership.

IX. Acknowledgement and Agreement: The signatures here certify that the information provided by the applicants is true, and any misrepresentation may result in civil or criminal liability, including monetary damages, fines, and imprisonment.   The borrowers should carefully review the application for correctness before signing.  Borrowers are also required to notify the lender of any changes in their financial or employment status prior to closing.  They are also giving the lender the right to transfer this information to other lenders, and to use any source available to re-verify the provided information.

Why is this important?

It is illegal to provide false information on the loan application.  Any misrepresentations may result in civil or criminal liability, including fines, monetary damages, and imprisonment for either the loan officer or the applicant(s).

X.  Information for Government Monitoring Purposes: Mortgage companies must comply with HMDA, which requires gathering information regarding ethnicity, race and sex for each applicant.  The applicant is not required to provide this information, but the lender is required to note the information based on visual inspection if the applicant refuses to answer.

Why is this important?

The federal government wants this information for three purposes.  First, they need to know if the lender is discriminating against any individuals or groups of people.  Second, it helps them determine if any of the targeted loan programs are achieving the desired result.  Third, it helps them to design future loan programs to assist members of society that are not being adequately served with regard to home ownership.  Fannie Mae, Freddie Mac, and FHA are charged to develop loan programs to target specific areas and demographics that are underserved by the standard loan programs.