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Hong KongAssets, liabilities and credit analysis
Assets must be sourced and seasoned, large deposits explained, and reserves expressed in months of PITI. Credit analysis looks at payment history and depth rather than at the score alone.
Two of the three Cs sit here. Credit, and part of capacity.
Sourced and seasoned
Sourced means the lender knows where the money came from. Seasoned means it has been in the account long enough to be treated as the borrower's own.
A deposit that appears shortly before closing raises the obvious question: is this a gift, or is it a loan that will need repaying and does not appear in the ratios?
A borrower who takes a personal loan for the down payment and does not disclose it has misrepresented their position. The payment belongs in the debt ratio and the underwriter has been denied it.
Gift funds
Permitted on most programs, from a defined relationship, and documented with a gift letter stating that no repayment is expected.
The letter is the point. A gift with an unspoken expectation of repayment is a debt, and the letter is what makes the position explicit.
Reserves
Expressed in months of PITI. Two months of reserves means two months of the full housing payment left after closing.
Reserves are also a compensating factor. Substantial ones can support a ratio slightly over benchmark.
Reading a credit report
Not just the score. Underwriters look at payment history, the depth and age of the file, credit utilization, recent enquiries and the presence of derogatory items.
A thin file with a good score can be weaker than a long file with an old blemish, which is why judgment enters manual underwriting.
Derogatory items
Collections, charge-offs, judgments, tax liens, foreclosures and bankruptcies. Each has its own treatment and its own waiting period by program.
What the exam asks about most is the requirement to explain rather than the specific period.
Common questions
What does sourced and seasoned mean?
Sourced means the lender knows where the funds came from. Seasoned means they have been in the account long enough to count as the borrower's own.
Can gift funds be used?
On most programs, from a defined relationship, with a gift letter confirming no repayment is expected.
What are reserves?
Funds remaining after closing, expressed in months of PITI. They can act as a compensating factor.
Why must large deposits be explained?
To establish they are not an undisclosed loan, whose payment would belong in the debt ratio.
Is the credit score all that matters?
No. Payment history, file depth, utilization, recent enquiries and derogatory items all count.