Ask an RU: Best Practices to Handle Assets and Reserves for Loans?

Borrowers come with many stories and backgrounds. That’s why you’ll need to be prepared on how to best navigate their various types of assets and reserves. We’ve got you covered!

Marilyn Richter, Regional Underwriter at Enact, dives into some best practices on how to handle assets and reserves when you need an underwrite for your loans. Stay in the know by keeping a tab on GSE guidelines, too!

Get to know assets and reserves

In the financial space, an asset is a resource with economic value that an individual, a company, etc. owns or controls with the expectation that it’ll provide a future benefit. A reserve, on the other hand, refers to cash or any other assets one can easily access to pay for their loan.

More frequently, our team is asked if assets covering a two-month period need to be documented in a loan underwrite… This ultimately depends on if you’ve run the loan through an AUS or if you’re performing a standard underwrite. AUS findings may require you to provide anything from no documentation to 2 months asset documentation. Whereas a standard underwritten loan typically requires 2 consecutive months of statements. Another option is a VOD, which includes a 60-day average balance, unless there is an overlay that allows reduced documentation.

What are the most common asset types?

The most common asset types are depository accounts, securities and retirement accounts.   Some asset types may be able to be documented without 2 months of statements.

A few of these include (but not limited to):

• Government Bonds
• Gift funds or gifts of equity*
• Borrower’s real estate commission
• Proceeds from the sale of borrower’s asset
• Bridge loans
• Borrowed funds secured by an asset
• Cash value of Life Insurance
• Credit card reward points
• Credit cards (to pay for certain fees)

*See guidelines to determine when a gift may be used for consideration of borrower’s own funds.

Be sure to check the guidelines for Freddie Mac and Fannie Mae to determine what documentation is required when documenting assets.  If you are using assets that are from outside the United States, please check with the GSEs or your investor to determine what their requirements are.

Breaking down asset liquidation

FHLMC Section 5501.3 Asset eligibility and documentation requirements – Effective 09/04/2024

Let’s talk about the 20% Rule for asset liquidation.

When assets that are invested in stocks, bonds, mutual funds, U.S. government securities, retirement accounts or other securities are needed for closing, evidence of liquidation is required unless the combined value of the assets is at least 20% greater than the amount from these assets needed for closing. Any amount of cryptocurrency must be exchanged for U.S. dollars if it will be used as a source of funds for the Mortgage transaction (i.e., any funds required to be paid by the Borrower and Borrower reserves).

FNMA B3-4.3-01, Stocks, Stock Options, Bonds, and Mutual Funds (06/30/2015)

Stocks, Stock Options, Bonds, and Mutual Funds

Vested assets in the form of stocks, government bonds, and mutual funds are acceptable sources of funds for the down payment, closing costs, and reserves provided their value can be verified. The lender must verify the borrower’s ownership of the account or asset. The value of the asset and any related documentation must meet the requirements outlined in B3-4.3-01, Stocks, Stock Options, Bonds, and Mutual Funds.

When used for the down payment or closing costs: 

• If the value of the asset is at least 20% more than the amount of funds needed for the down payment and closing costs, no documentation of the borrower’s actual receipt of funds realized from the sale or liquidation is required. Otherwise, evidence of the borrower’s actual receipt of funds realized from the sale or liquidation must be documented.

When used for reserves: 

• 100% of the value of the assets may be considered, and liquidation is not required.

Sample calculations for asset/reserve scenarios

Example #1 Scenario. 

Total borrower funds needed to close is $30,000. Borrower has $33,400 in verified assets ($25,000 in a checking account and $8,400 in a retirement account invested in mutual funds).

Policy Direction:

1. Subtract the checking account assets of $25,000 from the total funds required to close. Evidence of liquidation is not required for these types of accounts.

$30,000 – $25,000 = $5,000 additional funds needed.

1. Compare the $8,400 in the retirement account to the additional $5,000 of funds needed to determine if evidence of liquidation is required.

• $5,000 X 20% = $1,000.
• $5,000 + $1,000 = $6,000

Because the borrower has more than $6,000 in a retirement account, evidence of liquidation is NOT required.

Example #2 Scenario.

Total borrower funds needed to close is $20,000. Borrower has $22,000 in verified assets ($2,000 in a checking account and $20,000 invested in a stock account).

Policy Direction:

1. Subtract the checking account assets of $2,000 from the total funds required to close. Evidence of liquidation is not required for these types of accounts.

$20,000 – $2,000 = $18,000 additional funds needed.

1. Compare the $20,000 in the stock account to the additional $18,000 of funds needed to determine if evidence of liquidation is required.

• $18,000 X 20% = $3,600.
• $18,000 + $3,600 = $21,600

Because the borrower has less than $21,600 in the stock account, evidence of liquidation IS required.

Handling mortgage reserves

The number of months reserves required for a mortgage loan may vary depending on the loan purpose, loan amount, and/or occupancy. If you have AUS findings, typically you will be able to document assets as required by the DU Approve/Eligible or LPA Accept/Eligible findings report.  On a standard manual underwrite remember to check with your investor and/or MI company to confirm their requirements as it could be as much as 12 months reserves.

Access Fannie Mae’s Selling Guide and Freddie Mac’s Seller/Servicer Guide for more information on navigating these monetary sources.

More Ways We Can Help

Your Enact MI team has got you covered. They can answer any of your important questions about assets and reserves and provide you with even more underwriting best practices! Our Regional Underwriting Team is available to assist you Monday-Friday 8am to 8pm ET at 800-444-5664 option 2.

Be sure to make the most of your MI experience, too. Please explore our many underwriting resources and underwriting tips for more information. Because going the extra mile comes easy for us, we also offer a comprehensive suite of training resources to help boost your industry experience.

Source:  Marilyn Richter is a Regional Underwriter for Enact.

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