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Using Investment Assets for a Mortgage Application

TLDR

What You Need To Know

  • To help a borrower qualify for a mortgage, lenders can count an investment’s dividends and interest as income
  • You’ll need to prove ownership of your investment assets and demonstrate income so lenders can apply that income to your mortgage loan
  • If your investments are small and don’t produce a significant income, that doesn’t mean they won’t go up in the future. Keep investing. Remember, you have to start somewhere

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Investments are a valuable way to plan for your future. And if you’re planning on buying a house, they can be particularly valuable assets now. You can use these assets for a mortgage application.

If your main source of income isn’t enough to qualify for a mortgage loan or you’re wondering if you can qualify for a bigger home loan amount, investment accounts can act as secondary streams of income or mortgage reserves that help you qualify for a mortgage (or a bigger one).

We’ll help you sort through your different investment options and outline how each asset can help you qualify for a mortgage loan. 

Why and How Lenders Look for Reported Investments

If you have investments, you’ll be a more attractive borrower to mortgage lenders. Investments signal to lenders that you have backup streams of income or money set aside that you can tap into in case something happens to your primary source of income. 

Like the IRS, mortgage lenders only count dividends and interest as monthly income

  • Dividends: They are shares of a company’s profits that are distributed and shared with investors. 
  • Interest: When you invest, you lend money to companies, and they pay you back in interest. 

How lenders calculate your investment income for mortgage application

To use investment income for mortgage qualification, your lender will take the average of your dividends and interest over the past 3 years. 

If your assets made $5,000 in dividends and interest in 2019, $4,000 in 2018 and $6,000 in 2020, that would average out to $5,000 in qualifying dividends and interest over the past 3 years. The average would be divided by 12 and added to your monthly income to help you qualify for a mortgage or get better terms.

However, your lender may discount investment income based on two factors:

  • Your income has declined over the past three years: If your dividends and interest have shrunk over the years, your lender will have to decide if your income from investments will continue to shrink.
  • You’re using some of the principal for the down payment: Remember, dividends and interest are paid based on the principal in the investment. If you’re using a portion of your principal to make a down payment, lenders may discount your qualifying income

Different Types of Investment Assets to Report

In this section, we’ll explore two different types of investments: market investments and bank investments. We want to help you evaluate your investments and decide which investment types will help you qualify for a mortgage loan down the road. 

While it’s not always clear which investment assets will be helpful when looking at a home loan program, it’s important to disclose whatever assets you have. Your mortgage lender can help you understand which investment assets they’ll use for your loan approval. 

Let’s start with market investments. 

Stocks and bonds

When you buy stock in a company, you’re essentially purchasing a small share of the company’s ownership. You become “invested” in the success of the company. If the company tanks, you could lose your money, but if it grows, your share could be worth far more than your initial investment.

Investing directly in stocks is a straightforward option for people who either want to track the market or invest in companies they believe in. Investors buy stock in companies they see lots of potential in or believe are undervalued with room to grow. 

Bonds are different. When you buy bonds, you loan money to a company or, in the case of government bonds, to federal, state or local governments. The company or entity uses the money you’ve loaned them, and they pay you back in interest over the bond’s term (aka length of the loan). Once the bond’s term is up, they’ll pay you back the amount you originally invested. 

While this can be a relatively low risk if a company is strong, if the company goes under, you may not get your initial investment back. 

Managed funds: ETFs and mutual funds

Managed funds, like ETFs and mutual funds, are the perfect middle ground between individual stock options and separately managed accounts. They can help investors who don’t want to manage their funds but still want investment options.

You buy shares of a fund that’s invested in many stocks in one industry. Because of this, funds are considered less unstable than individual stocks, because they don’t rise and fall with the successes or failures of individual companies. Funds are often reflective of the market as a whole.

Both ETFs and mutual funds provide options for a diversified portfolio, but they aren’t the same thing. 

There are a handful of minor differences, like average fees, but the biggest difference is in how they’re traded. ETFs are traded throughout the day, while mutual funds are traded at the end of each day. 

Separately Managed Accounts

Next, let’s dig into separately managed accounts. These high-fee, high-return investments will put you in a great position with your lender. 

Managed accounts are investment accounts that are actively managed by professional money managers. This is a highly personalized investment account option. You share your preferences with a money manager, and they build and maintain an investment portfolio with your money.

Your investment account will be a curated combination of stocks, bonds and managed funds. You share your risk tolerance with your money manager, and they build a portfolio that matches the amount of risk you’re comfortable taking with your money.   

You can specify which industries you don’t want to be invested in, what type of liabilities you’re open to and when your money manager sells shares. Once your money manager has the necessary info, they can make investment decisions, build your portfolio and actively trade it to keep it competitive. 

Managed portfolios run by professional money managers do come with high fees and are best for high-net-worth investors. 

If you have one of these accounts, you may be in good shape to boost your chances of qualifying for a mortgage. 

Bank Investments

Certificates of deposit (CDs) and money market accounts (MMAs) are both great entry-level investments – especially if you’re intimidated by the unpredictable rise and fall of the stock market. Rather than investing in a company or the stock market, you invest in your bank with a unique type of bank account.

While the interest rates on these products will vary based on current interest rates, you’ll get a higher rate than you would with a basic savings account (but a lower rate than an investment account). These accounts may also have minimum balance requirements. 

  • CD: A CD parks your cash reserves in a bank or credit union anywhere from 6 months – 5 years. In exchange for not touching the money, you earn a high interest rate. Once the CD’s term is up, you can withdraw the cash.
  • MMA: An MMA is another way to leave your cash in the bank in exchange for a high interest rate. MMAs work like a savings account, but you may need a higher balance to open an account, and there may be restrictions on how much you can withdraw.

How Lenders Verify Your Investment Income 

For asset verification, mortgage lenders will ask you to prove ownership and demonstrate income as part of the mortgage loan application. You should be able to find the necessary paperwork through your bank or investment manager’s website. 

  • To prove ownership: You’ll need to submit account statements in your name that show your fund balance. 
  • To demonstrate income: You’ll need to submit your tax returns as well as any schedules filed from the past 2 or 3 years. They will detail any dividend or interest payments you’ve received.

Considering Buying a Home Down the Road? Invest Now

Your investment assets can play an instrumental role in helping you qualify for a mortgage loan. 

If you’re applying to borrow a mortgage now and you plan to use your dividends and income as qualifying income, collect your proof of ownership and income to share with your lender. If you’re not quite ready to buy a home, now might be a good time to consider making investment decisions that could help you afford your future home.

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ICYMI

In Case You Missed It

  1. Managed funds, CDs and money market accounts are great assets for new investors because they’re less risky and easier to manage

  2. The income from your dividends and interest may be discounted if it’s gone down in the past 3 years, or you’re using some of the principal for the down payment and other closing costs

  3. Your lender will need account statements, tax returns and schedules from the past 3 years to evaluate your investment asset income

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