Understanding Asset Reserves

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Mortgage and Lending with Guaranteed Rate, Marin County, CA NMLS: 22343
RPM Mortgage in California

Understanding Asset Reserves

 

Most first-time home buyers have a fundamental grasp on the fact that they will need to come up with down payment funds in order to close their transactions. Perhaps the move-up buyer also takes into consideration the total settlement charges needed; things such as lender fees, title and escrow costs and pro rata interest. But it’s a safe bet that even the financially savvy are not especially familiar with a third category of asset qualification, those that we in the lending industry classify as reserves.

 

Simply put, reserves are the funds that a borrower has left over after the close of escrow. And lenders measure reserves in months. So, for example, if you have a Mortgage Reserves $3000 total monthly housing payment (or "PITI" for "principal, interest, taxes and insurance"), and you have $36,000 worth of total assets in your accounts post-close, you have 12 months of reserves. Various loan programs will have differing requirements on reserves (especially jumbo loans), while some have no minimums (like FHA loans). But in general, and even if not required for approval, reserves can provide additional strength to a borrower’s profile for the obvious reason that should a financial hardship befall the homeowner, reserves could theoretically be used make the ongoing mortgage payments and keep the loan current.

 

What counts as reserves? This is a trickier question. It’s a safe bet that all liquid funds can be included in the lender’s total. Checking, savings and money market Mortgage Reservesaccounts are of the first order. Investment portfolios containing stocks, bonds and mutual funds can typically be factored into the reserve calculation as well. Where things get a little more dicey is with retirement accounts --- often a place where borrowers retain a good portion of their savings. Usually a mortgage lender will only consider 60 to 70% of the vested balance of a 401K or IRA when calculating eligible reserves from these sources, this to allow for taxes and penalties that could be incurred.

 

Your mortgage professional has an understanding about the reserves you must document for your current loan application, and has a sense about the funds that  should be included to create the strongest file.  Regardless of with whom you may be working, I’m available to answer any questions on this subject at any time.

 

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Robert J. Spinosa

Home Loan Professional
BRE: 01297944 NMLS: 22343

1058 Redwood Highway
Mill Valley, CA 94941

877.270.5959 Toll Free
415.367.5959 Cellular
415.366.1590 eFax
rspinosa@rpm-mtg.com

Rob Spinosa

 

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Lora "Leah" Stern 914-772-4528 10/06/2013 03:30 AM
Topic:
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Location:
California
Groups:
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Tags:
retirement
home loan
closing costs
down payment
assets
qualify
reserves
funds
real estate
liquid
piti
mortgage

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Rainmaker
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John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service

Rob - Thank you for sharing an excellent blog about understanding asset reserves.

Oct 05, 2013 07:28 AM #1
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Ralph Gorgoglione
Maui Life Homes / Metro Life Homes - Kihei, HI
Hawaii and California Real Estate (310) 497-9407

Rob, as you pointed out, asset reserves must be considered before one can seriously be considered for a loan, so proactively planning for such requirements is always a good idea. Thanks for the post.

Oct 05, 2013 10:34 AM #2
Rainmaker
537,258
Rob Spinosa
Guaranteed Rate, Marin County, CA - San Anselmo, CA
Vice President of Mortgage Lending, Marin County

Thank you John and Ralph.  Here in CA, we have higher home values and that can mean jumbo loans for our buyers.  Nowadays, jumbos are heavily reliant on asset and reserve profile for qualification.  It's not a point that can be overlooked.  Simply coming up with down and closing costs on a jumbo loan is no longer enough and our clients need to understand that.  Again, I appreciate the feedback.

Oct 05, 2013 11:17 AM #3
Rainmaker
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Wayne Johnson
Coldwell Banker D'Ann Harper REALTORS® - San Antonio, TX
San Antonio REALTOR, San Antonio Homes For Sale

Rob-Is there firm guidance on the amount of reserves that are needed to make a deal work in CA?

Oct 05, 2013 11:50 AM #4
Rainmaker
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Rob Spinosa
Guaranteed Rate, Marin County, CA - San Anselmo, CA
Vice President of Mortgage Lending, Marin County

Wayne --- no there are not across-the-board firm guidelines.  There are some general rules for programs that are not jumbo, but when you get into jumbo loans themselves, your buyers should expect at least 6 months PITI, but possibly closer to 12 months PITI on most scenarios.  FHA typically will use reserves as a compensating factor and reserves help conventionals approvals where there are other risk layers (high debt-to-income, higher loan-to-value, lower FICO, etc.). 

Oct 05, 2013 12:06 PM #5
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Rob reserves can be the difference between getting an approval or not even in a situation where reserves are not required by the loan program.  The power of extra available assets is amazing.

 

Oct 05, 2013 01:15 PM #6
Rainmaker
537,258
Rob Spinosa
Guaranteed Rate, Marin County, CA - San Anselmo, CA
Vice President of Mortgage Lending, Marin County

George --- agreed.  We have brought many a DU or LP back to life by adding the borrower's reserves.  With underwriting scrutiny the way it is today, you have to walk a fine line.  You don't want to add any account statements you don't need, for fear of having to document deposits, but on the other hand, you sometimes must lean towards adding reserves to compensate for another risk layer.  This is another reason why it's so important for our prospective clients to really think about working with a pro.  You can't get this kind of experience and action from a call center.

Oct 05, 2013 01:22 PM #7
Rainmaker
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Lora "Leah" Stern 914-772-4528
Coldwell Banker, 170 N Main Street, New City NY 10956 - New City, NY
Real Estate Salesperson

Rob, what a great and simple to understand explanation of what asset reserves are and how they bring strength to your financial position.

Oct 06, 2013 03:24 AM #8
Rainmaker
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Tim Lorenz
TIM LORENZ - Elite Home Sales Team - Mission Viejo, CA
949 874-2247

Thank you Robert that was truly an important blog to inform us on asset reserves. 

Oct 06, 2013 03:35 AM #9
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Debbie Reynolds
Platinum Properties - Clarksville, TN
Your Dedicated Clarksville TN Real Estate Agent
Reserves are an important part of the mortgage equation. I for one don't think borrowers should spend their limit on any mortgage.
Oct 06, 2013 06:45 PM #10
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Jerry Newman
Brown Realty, 210-789-4216,www.JeremiahNewman.com - San Antonio, TX
Texas REALTOR, San Antonio Military Relocation

Rob, This is a very well written and very informative post that every potential buyer needs to know. Thanks for getting the word out. Have a Great Day!

Oct 11, 2013 02:34 AM #11
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Rainmaker
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Rob Spinosa

Vice President of Mortgage Lending, Marin County
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