In order to qualify for many of today's mortgage products a buyer would need to have enough funds to cover down payment, closing costs ( this includes lender fees, attorney fees etc) and in many caese, asset reserves. What exacgtly are asset reserves and how much in reserves are you required to have?More About Rob Spinosa gives a great explanation of asset reserves and how, even if not required, having several months of reserves goes a long way to strengthening your financial package and getting that loan approved.
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 $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 accounts 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.
Robert J. Spinosa
Home Loan Professional
BRE: 01297944 NMLS: 22343
1058 Redwood Highway
Mill Valley, CA 94941
877.270.5959 Toll Free