Investing in rental property - The loan application and the balance sheet

You are wanting to invest in rental property and you are applying for a loan using the standard loan application.

The loan officer hands you a Fannie Mae-1003 loan application. Most mortgage loan officers will help you fill out the application however it is important to understand what some of it means. Most of it is general information about yourself that is self explanatory such as your name, date of birth, and your place of employment. However, the balance sheet portion of the application (page 3) can be the most difficult to understand but one of the most critical. This is the portion that asks for assets and liabilities. The purpose of this portion of the loan application is to take a “snap-shot” look at the borrower’s financial condition and determine their whether they are financially sound enough to take on more debt. So what are assets and liabilities.

Assets are basically anything you own that is considered to have value. On the balance sheet, assets are on the left and liabilities on the right. On the asset side, it will ask for a subtotal of liquid assets. So what are liquid assets? Liquid assets are assets that can easily be converted to cash or are equivalent to cash such as bank accounts, stocks and bonds, as well as the cash value of a life insurance policy. On the life insurance, most people have a hard time understanding that only a whole life policy has any cash value and the existing cash value is what is put in this column. The face value of a term-life policy would not be listed as an asset because this asset would only be recognized if you died and the policy was honored.

As you go down the asset side of the balance sheet towards the bottom, it asks for real estate, retirement funds, net worth of a business, as well as personal property such as autos. Under real estate you would list the total value of all real estate owned which would consist of your homestead as well as any other investment property that you may own. There is a table at the bottom of the page of the loan application that asks for more detailed information on your real estate and should be completed to help with this part of the balance sheet.

Vested interest in your retirement fund would be the balance that you are actually eligible to take out of a 401k or a similar plan. This may or may not include any employer matches and will likely be determined by the length of time you have been in the plan. Net worth of businesses owned is the actual net equity that you have as an owner in a corporation or another entity. If you are a 50% partner in a business then half of the net worth of the business would be yours and that amount would be put in the column.
Automobiles is the next item and consists of the current value of all automobiles you currently own. At the bottom it will ask for other assets. In this category you list the value of all household and personal property such as furniture, equipment, tools, and anything that you would consider to have some value. When all categories are added up, the total is what you have or own in total assets.

On the liabilities portion of the balance sheet, or the right side, the first several spaces asks for the name of the creditor, the monthly payments with the amount of months left as well as the unpaid balance of any notes. This consists of your vehicle loans, credit cards, as well as any mortgage payments you may have. Once these are added up, this reflects your total debt. Your net worth is determined by subtracting your liabilities from your assets. The higher your net worth the better. If you will notice Alimony and job-related expenses are shown as payments and considered in your monthly payments and cash flow but are not necessarily considered a liability and therefore are not considered in the unpaid balance portion of the liabilities.

The balance sheet that is on the application is a very basic form and balance sheets can be far more complex with much more detail. However, the above are the basics and usually cover most people that are applying for credit. If you borrow money to purchase a home or investment property you will likely always fill this same application out each time. As I stated, a good mortgage loan officer will help you with most of it and in some cases do most of the work with your information provided but it is always good practice to understand what it is and why they are asking for it.