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  MORTGAGE REFERENCE LIBRARY

Reserves

A cash amount that a homebuyer must have on hand after making a down payment and paying all closing costs. The reserves required by the lender must equal the amount a homebuyer would pay for principal, interest, taxes and insurance for a specified number of months.

The amount of reserves required may be dependent on the type of loan you are obtaining.

Reserves are also called assets. Liquid assets are monies deposited in savings accounts or checking accounts held at Banks, Savings and Loans (S & L) or Credit Unions.

Stocks, mutual funds, 401K accounts, money market accounts, SEP aacounts, are also considered assets.

Your lender may require anywhere from 2 months of PITI to 6 months of PITI. And usually it's more for a person that doesn't have mortgage history on their credit.

As proof of reserves, lenders often require two current, consecutive bank/stock accounts statements showing the available funds. In the rare occasions where your bank and financial institutions do not offer past monthly statements on their websites, your mortgage broker can request a Verification of Deposits from them.

Lenders refer to the money you have left after you've bought your home as 'reserves'. Reserves can include money in your checking/savings, mutual funds, retirement accounts, stocks, and bonds. Typically, borrowers with a higher amount of reserves are a lower risk. Lenders often look for you to have a minimum of two months of mortgage payments left in your account after the closing. However, not all mortgage programs require that you have reserves, so please check with your mortgage lender for all of your options.

Lenders generally consider a borrower who has some liquid reserves to be less risky than one who does not. Therefore in many loan programs, borrowers who can prove that they have reserves can get better terms on their loan. This is especially true in loan programs where the borrower is not required to prove their income.

If you have good credit but not the required reserves, you may want to look at a Stated Income Stated Asset(SISA) or No Income No Asset(NINA) loan where assets are not verified.

It is important to remember that there are many different types of loan programs available and they all have different requirements. As a general rule of thumb, it is ideal to have 6 months of reserves. Most programs only require 2 or 3 months so if you have 6 months worth stashed away, your loan will go much smoother. Also, for 401k and other retire accounts, most lenders will only consider 75% of the full value towards reserves. This is because most retirement accounts have early withdrawl penalties.

One thing to keep in mind is that FHA does not require reserves.

When dealing with Option ARM's, it is important to remember that the PITI is calculated from the fully indexed rate. Even if you have the option to pay a minimum payment, you must have enough reserves for the fully amortizing payments.

With investment properties which are financed 100% with no money down, you will often be expected to hold PITI reserves of Six months or more.

Often your reserves will have to be seasoned.

Subprime lenders are less stringent on reserve requiremens. Some do not even source or season your reserves, meaning they do not care where or how you came up with the reserves, just as long as you have them.

Mortgage professionals that use DU, or Desktop Underwriting, love reserves and have a better chance at qualfying a loan for a borrower who is borderline or slightly below normal conforming guidelines. DU likes reserves and qualifies many borrowers who may not qualify under traditional underwriting or LP, Loan Prospector, underwriting. If you have a lot of reserves ask your mortgage professional if he/she is able to utilize DU for underwriting.

Reserves can often be borrowed from a friend or family member, but must be accompanied by sufficient documentation to show its source and reasoning.

Lenders like to see that a borrower has "reserves" after closing to show that even if something else comes up, such as a family emergency or job loss, that homeowner will still be able to make the mortgage payments.

When calculating reserves you may use stocks, mutual funds, 401K accounts, money market accounts and SEP aacounts. Lenders will typically count 70% of your current value as reserves for these types of assets.

Retirement accounts which you cannot access at all until retirement, such as pension funds, generally cannot be counted as reserves. However certain personal property assets which you possess, such as gold, diamonds, even musical instruments, and have proof of value, such as a recent verifiable appraisal or insurance policy, may be considered by some lenders when calculating reserves.

Even if your loan wont require reserves, its always a good idea to make sure you have them anyways. First time home buyers are especially encouraged to have reserves as they may not fully understand the additional costs of home ownership.

Some lenders will allow cash out on a refinance loan to be used for the reserve requirement. Contact your local mortgage professional to see what your options are.

Your mortgage consultant will inform you on what can be used as a reserve for your home loan.

Reserves are the amount of cash, stocks or retirement accounts left over after a home purchase. Lenders use this amount to indicate how likely a borrower is to repay the loan. Reserves may effect the interest rate that a lender will charge.

DISCLAIMER: The information contained in this article on 'Reserves' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.

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