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Reserves

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.

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.

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 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.

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.

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.

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

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.

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.

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.

Reserves Explained - In the mortgage business, the word "reserves" has more than one meaning. It can refer to the monies (assets) required by the lending bank - to be on hand in the borrowers deposit accounts at the time the loan closes.

When a lender is asking for seasoning or reserves on assets, this usually is refering to liquid assets such as checking and savings. The lender uses the borrowers assets as a indicator for measuring the borrower's ability to repay a loan. The assets also show the borrowers pattern of savings and ability to support financial obligations.

Most lenders want a borrower's reserves to be seasoned for a minimum of 60 days. Seasoned means that they must show proof that they have had this money for at least 60 days. A lender doesn't want to see that a borrower just had a large amount of money deposited into their account just recently, or they will require proof of where the money came from along with a letter of explanation. This safeguards the lender that the borrower has not incurred a new debt or loan that needs to be calculated into their debt to income ratio.

Though a borrowers 401k accounts are used to show these reserves, the money in the 401k account is not actually drawn out it is simply shown to be available.

Although proceeds from the sale of your previous home are not technically "seasoned", they may be used for the down payment of a new purchase, as well as the necessary closing reserves.

A Verification of Deposits (VOD) is often used to show both source and seasoning of reserves or assets. This is a form that is filled out and signed by an official of the depositing institution that verifies such things as the current balance, daily deposit average, account numbers and other information.

Fannie Mae continues to tighten up approval guidelines.

By putting accurate reserves on your 1003, you actually will receive LESS DOCUMENTATION requirements! Most often, Fannie will only require verification of some of the funds listed, not all (for example, borrowers may have checking, savings, and retirement totaling $12,500, but D.U. findings may need NONE verified, or perhaps only $500 verified...then you do not need to send in all asset verifications, just the $500)

Remember - every little bit helps!!

Checking Accounts count at 100% of balance (recent large deposits may need to be explained)
Savings Accounts count at 100% of balance (recent large deposits may need to be explained)
Stocks / Mutual Funds count at 100% of balance
401k / IRA count at 70% of vested balance
Cash balance for life insurance policies count at 100% of cash balance
Most other retirement accounts may not count, including pensions, PERA accounts, etc.

You can usually count the cash value of a life insurance policy as well.

The other form of "reserves" in a mortgage transaction are those monies required by the lender to go in escrow, if one is created.

Many wonder why reserves are sometimes required. This gives the lender more sense of security when lending you the money for your home. If any life changing situations should occur, and you have 6-12 months of "reserves" available, you are likely to use these funds to make your payments in order to keep your house. This makes you less of a risk in the lenders eyes.

With retirement accounts you may be required to contact your human resource department to get a statement explaining how readily available these accounts would be and what the process for taking any money out would be.

Reserves are assets that a home buyer has after settlement. It is one of four underwriting criteria, as with credit, income, and loan-to-value ratio. Most banks require borrowers to have 3 to 6 months worth of housing expenses in reserve after closing. Reserves do not have to be liquid. They can be in the form non-liquid investments such as stock securities, bonds, retirement funds, etc.

Many banks do not consider state controlled retirement funds when using borrowers deposit records to detrmine how much cash reserves they have. This is because many state controlled retirement funds are inaccessible to their contributors.


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