How Net Worth Affects Your Mortgage Application

 In Common Questions, Qualifying for a Mortgage

Very often, people ask us whether there is a requirement for a minimum amount of net worth before they can get approved for a mortgage. Here’s how net worth affects your mortgage application.

Net Worth

First, let’s define what net worth is.  The formula to calculate net worth is simple: add up all of your assets and subtract all of your liabilities.  The difference is your net worth. Total assets – total liabilities = net worth.

Assets

Here is a list of the main things that are included in your assets:

  • Value of your home
  • Value of your cars and other vehicles
  • Amount you have fully vested in retirement accounts
  • Amount you have in investment accounts – stocks, bonds, mutual funds, etc.
  • Amount of money you have in the bank.  Include everything – checking accounts, savings accounts, CDs, money market accounts, health savings accounts, etc.
  • If you have any other assets of worth, such as artwork, jewelry, furniture, collectibles, etc., add the value of these, too.  This should be the appraised value, not just a guess of what they are worth.

Add up the value of all of these things and you will have your total assets.

Liabilities

Now, you need to calculate your total liabilities.  Here are some common things to include as liabilities.  Use the total amount you owe, not the monthly payment.

  • Mortgages you have, including any second mortgages.  Also include the outstanding balance of any home equity lines of credit (HELOCs) you have.
  • Car loans
  • Outstanding balances of all credit card accounts
  • Student loans, including any that are in deferment or forbearance
  • Taxes you currently owe
  • Any judgments or liens against you
  • Outstanding medical bills
  • Any other outstanding bills

Add up the amount you owe for all of these things and you will have your total liabilities.

Now, to get your net worth, subtract the total liabilities from the total assets.  If the total of your assets is greater than the total of your liabilities, your net worth will be a positive number.  If the total of your liabilities is greater than the total of your assets, your net worth will be a negative number.

Loan Approval

So, how does your net worth affect your ability to get approved for a mortgage?  It doesn’t. Mortgage lenders do not care at all what your net worth is.

Lenders care about the following:

  • Credit – do you have a history of paying your bills on time?
  • Income – do you make enough money to pay the mortgage you are applying for and all of your other monthly bills?
  • Assets – do you have enough money to pay for the down payment and the closing costs?

That’s it – credit, income, and assets.  We don’t care at all about your net worth.  

That’s great news for people with low net worth or negative net worth.  Even if you owe much, much more than the value of the things you own, it doesn’t make you a bad credit risk.  If you pay your bills on time, make enough money to pay your monthly bills (including the mortgage you are applying for), and have enough money for the down payment and closing costs, you can get approved for a mortgage.

This might seem unfair to people who have a high net worth, but remember, if the things you own are worth more than the things you owe, that doesn’t mean you pay your bills on time or make enough money to pay the mortgage you are applying for.  

So forget about your net worth when applying for a mortgage.  It just doesn’t matter at all.

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