Borrowed Funds Secured by an Asset
When you’re buying a home, you might need money for the down payment or to cover closing costs. One way to get this money is by borrowing it, as long as you promise something you own as security for the loan. This means if for some reason you can’t pay back the loan, the lender can take the item you’ve promised as security. This is okay to do and is seen as you getting back some of the value from something you already own.
You can use many things as security for a loan. This includes things you can move, like a car or pieces of art, and things you can’t, like a piece of land or a house. You can also use money you have saved up or invested, such as in a savings account, stocks, bonds, or your 401(k) retirement account.
Secured Loans as Debt
If you decide to take a secured loan, the lender looking at your mortgage application must think of the payments you have to make on this loan as part of your monthly debts. This is important because it affects whether you can afford the mortgage.
But, if you get a loan that doesn’t require you to make monthly payments, the lender has to figure out what those payments might look like and still count them as if you were making monthly payments.
There’s one exception to this rule. If you’ve borrowed against your savings or investments, the lender doesn’t need to count these loan payments as monthly debts. This is because it’s seen as you borrowing your own money.
Reducing the Asset by the Amount Borrowed
If you’re also counting the money or investments you’ve borrowed against as part of your emergency funds or reserves for the mortgage application, you have to lower the value of these by the amount you’ve borrowed. This means if you have $10,000 in a savings account and borrow $5,000 against it, you can only count $5,000 as part of your reserves.
Documentation Requirements
To prove you’ve borrowed money and secured it with an asset, you need to provide the lender with certain documents. These include:
1. The loan agreement showing the terms of the loan.
2. Proof that the person or company giving you the loan is not involved in selling the house to you.
3. Proof that you’ve received the loan money.
This documentation is necessary to make sure everything is clear and above board, and to prevent any misunderstandings about the source of your down payment and reserves.
References
For more details, visit Borrowed Funds Secured by an Asset of the Fannie Mae Selling Guide.