The Affordability Conversation

The guide in brief

Save more or buy now: the guide in brief

Here is a plain summary of the main points in The Affordability Conversation, a one-page framework for financial planners and advisors whose clients ask whether to wait and save a bigger down payment. It is general information on how a lender reads a file, not investment, tax or individualized financial advice. The plan, and the advice, stay with you.

Reframe the question

A client who asks whether to keep saving usually thinks of it as a savings question. On the lender’s side it is a liquidity question, which is ground you already know well. A bigger down payment makes the loan smaller, but it can also empty the accounts that steady a household once the keys are handed over. Underwriters read both: the money that goes in at closing, and the money that is left afterwards. So putting more down is not automatically the safer move.

What the lender reads after closing

Along with the down payment and closing costs, the lender looks at the savings a client still holds once the loan closes, often called reserves. Bank and investment statements show both. Money left in the accounts can make the file stronger, not just the household, and each program sets its own rules for how much should remain. That means the cushion you work to protect and the loan your client wants can point in the same direction.

The tradeoff, to walk through together

There is rarely a single right answer, only the one that fits the plan. The guide sets out the points worth weighing with the client:

• cash that goes into the down payment cannot go back to work or back into an emergency fund;
• savings left after closing can count in the file’s favor as well as the household’s;
• what those dollars might have earned had they stayed invested, which is your judgment, not the lender’s;
• how long the client really expects to stay in the home, since the costs of buying and selling reward staying put.

The option many advisors have not heard of

For the right client, the assets can help carry the loan without being sold or pledged. An asset-based mortgage is an ordinary home loan, secured by the home, in which the lender reads the client’s statements and counts savings, brokerage and retirement accounts, each kind at a share of its value that varies by program. In one method, what is left after the down payment, closing costs and reserves is spread over a set number of months and treated as monthly income, with the client’s debts measured against it. In another, there is no income figure at all: the test is whether the assets left after closing are large enough. No tax returns are needed to show income, nothing is withdrawn, and the allocation can stay as it is.

Questions to settle before an application

• Would buying now drain a reserve the plan depends on?
• Would selling assets for the down payment set off a tax event you have been managing around? That one is for you and the client’s tax adviser.
• Could the client’s accounts help carry the loan without being sold, leaving the allocation intact?
• Is the honest answer that the client should rent for another year?

What the guide leaves off the page

How much of a portfolio a lender will count, and what an underwriter treats as truly accessible, changes with the type of account and with the program. So the guide does not commit a share to paper: the wrong share is how a client hears yes from someone who cannot deliver it. That part is a short conversation with a loan officer, once the accounts are known. And sometimes the honest answer is to wait. A lender who cannot say that out loud is selling, not advising.

To see how savings, investments and retirement accounts can be counted, read the asset-based loans page and try its assets as income calculator. For the documents and steps of a purchase, including the savings a lender reads after closing, see buying a home.