Buying A Home: Show Me The Money!
First question we all ask our new clients, “Can you afford to buy a new home?”
Yes, they ‘income’ qualify.
Yes, they can come up with the down payment either via their savings, 401K, or Gift funds.
No, they don’t qualify because of a lower credit score. Not necessarily because they have a lot of derogatory credit but maybe they have debt load, little-to-no credit, medical collections.
BUT DID YOU KNOW….. if a client can show 3 or more months in reserves for PITI of the new purchase it might just be a game changer? Reserves can prove to be a compensating factor and when automated underwriting systems are analyzing the overall risk factors and strengths – having reserves may very well tip the hat from a non-approval to an APPROVE!
Let’s talk about reserves requirements….. Reserves defined in mortgage banking are funds remaining after the down payment, closing costs and pre-paids are paid out at closing. Reserves are typically quantified in months - How many months of PITI (Principal/Interest/Taxes/Insurance) does the borrower have on hand after closing.
The loan program being used for financing the new home purchase will dictate the amount of reserves required if any. There are some specific requirements for “Reserves” that a buyer needs to understand in order for the money to actually be considered as reserves.
- Owner-occupied residences typically zero reserves; however, may range from 2 to 6 months depending on the investor and program used.
- For second homes, reserves can range between three to four months, but again, can be higher.
- On non-owner occupied properties or investment properties, reserves are usually six months PITI or more.
Now here is the kicker when multiple properties are owned – specific investors and/or loan programs will require a certain amount of reserves for ALL properties financed not just the subject property!
Assets that may be allowed as Reserves:
- Checking/Savings/CD/Money Market Accounts (large non-payroll deposits must be sourced – best bet is to have all reserves and monies required for closing seasoned for 2 months.)
- Business Accounts – may be restricted depending upon ownership, etc.
- IRA/401K and other types of retirement accounts
- Gift Funds
- Sale of Assets – must be documented
- Borrowed Funds that are secured with real estate
Assets that are not normally allowed as Reserves:
- Cash on hand
- Non-sourced deposits
- Sweat Equity
- Unsecured borrowed Funds
Helping homebuyers understand the details and compensating factors can be the difference between a mortgage approval or a denial. I literally used this knowledge of reserves to help a single mom get her mortgage loan approved just last week when another local lender said 'No.'
Knowledge is Power and Power produces Results!
Make it a great week............. Jody