Need a Jumbo Loan? Better Call in the Reserves
Here in the San Francisco Bay Area, and Marin County, where I'm located, we tend to see a lot of loan amounts that exceed the conforming and high balance conforming loan limits (respectively, $417,000 and $625,500, in most local metropolitan statistical areas). And I'll be honest with you --- this has less to do with stereotypes (hoodie-wearing 25-year olds snapping up funky, $2MM+ Victorians with their handsome stock payouts), and more to do with median home prices that tend to hover around the million dollar mark for the Average Joe. Whatever the combination of factors, the ability to offer well-priced, comprehensive jumbo loan programs to the Bay Area client is a necessity for me here at RPM Mortgage.
So when a borrower or Realtor approaches me about a jumbo loan, more often than not they do so with a fairly strong and intuitive grasp on the mighty triumvirate of loan approval: income, assets and credit. Oh sure, they also know that the home will need an appraisal (or maybe two, in the case of a very large loan), but for the most part, many are aware that to qualify in 2015, you need a strong profile on "The Big 3." So instead of covering familiar ground, I thought I would expand on one of the lesser known elements of a jumbo approval --- asset reserves.
Presently, when you attempt to qualify for a jumbo home loan, in addition to the funds needed for your down payment and closing expenses, the lender will require that you, the borrower, retain a certain number of months of total monthly housing payment (principal, interest, taxes and insurance, or "PITI") in reserve. So, let's say you're buying a home and the proposed housing expense will be $6000 per month. Let's also say that the loan program you desire requires six months of reserves. To qualify for this loan, you'll have to demonstrate that you have adequate funds for down payment plus closing costs THEN also document that you have an additional $36K in assets, somewhere and somehow.
What can be used for reserves? Great question. Obviously, anything already liquid. In our case above, if the buyer was making a $200K down payment and had $10K in settlement costs, plus the $36K in reserves, and could document a checking or savings account with $250K, everything would meet guidelines. A total of $246K in assets would be required, so we'd be $4000 above that need with 100% of the balance in these accounts usable/accessible.
But more often than not, we'll need to recruit (hardy har) investment or retirement accounts to meet the reserve requirements. In those cases, know that a jumbo lender will typically discount an investment portfolio (non-cash equivalents like stocks and/or mutual funds) to 70% of the value and discount a retirement account to 60% of the vested balance amount. In both of these cases, no liquidation is required, however, we will be expected to provide the terms of withdrawal for any retirement account. The lender will want to know that in a hardship the funds could be accessed, even at a penalty, to pay the mortgage. Most 401K and IRA accounts will have such terms.
In the cases where all the money may not be coming directly from the borrowers, be certain to check with us about using things such as gift funds or business funds for reserves. These can prove to be more involved, and their use will be allowed in some cases while forbidden in others. And for your general knowledge, typical reserve requirements on most programs will range from 6 months to 36 months. Fortunately here at RPM we have many strong programs that only require 6 or 9 months, even at higher loan amounts with aggressive loan-to-values.
Assets reserves are a lesser known element of a jumbo loan approval. But they are also a very real element of the process and one, along with credit tradelines, that is often overlooked until it is too late to change course. If you go into battle on a mortgage approval, let me know if you need to call in the reserves --- I've already mobilized and am ready to take up the fight.
Semper financing,
Rob Spinosa
Mortgage Loan Originator
NMLS: 22343 CalBRE: 01297944
Cell: 415-367-5959 Fax: 415-366-1590
rspinosa@rpm-mtg.com www.rpm-mtg.com/rspinosa
1058 Redwood Highway, Frontage Road, Mill Valley, CA 94941
RPM Mortgage, Inc. – NMLS#9472 – Licensed by the Department of Business Oversight under the Residential Mortgage Lending Act. Equal Housing Opportunity.
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