Reasons Why Lenders Require Cash Reserves For Homeowners

This BLOG On Reasons Why Lenders Require Cash Reserves For Homeowners Was UPDATED On July 11, 2017

There are many more benefits in being a homeowner versus a renter for those who are planning on not relocating in the next three to five years. Home Buyers can qualify for mortgages with bad credit and high debt to income rations. There are times where the Automated Underwriting System will require Cash Reserves For Homeowners. This is especially the case for mortgage loan applicants with the following:

  • Low Credit Scores
  • Prior outstanding collections and charge off accounts.
  • Late Payments after bankruptcy and/or foreclosure
  • High debt to income ratios
  • Purchase of multi-unit properties

Buying Versus Renting

There are many benefits of buying a home versus renting a home. Home Buyers can qualify for mortgage loan with little money down and can have low credit scores. Having Cash Reserves For Homeowners is considered as a compensating factor under the eyes of a mortgage lender.

  • In many cases, a renter can convert to being a homeowner with very little money down.
  • Their monthly housing payments can be the same as being a renter and in some cases.
  • Their housing mortgage payment can be lower than their monthly rent payments. 
  • Another major advantage of being a homeowner versus a renter is that the homeowner has the potential of accumulating equity in their home as time passes.
  • This is because a portion of their mortgage payment gets applied towards principal. 
  • Home prices have dropped to historical lows due to the real estate and credit meltdown of 2008 and has since been recovering since 2011.
  • Chances of appreciation is on the homeowners favor if they buy homes at today’s low values. 
  • There are many parts of the country where home values are consistently increasing year after year. 
  • One major disadvantage in being a homeowner is that homeowners need to maintain their home.
  • They no longer have landlords to depend on when things like furnaces, air conditioners, appliances, and fixtures break down, you as a homeowner are responsible for the repairs. 
  • Cash reserves for homeowners is highly recommended whether the lender requires it or not.

Certain Loan Programs Require Cash Reserves For Homeowners

Besides government and conventional loans, there are other loan programs where lenders will require Cash Reserves For Homeowners.

  • First Time Home Buyer purchase mortgage loans, bad credit home loans, high debt to income ratio mortgage loans, and regular conventional and standard mortgage loans may require Cash Reserves For Homeowners if AUS requires it. 
  • The majority of mortgage lenders do not require cash reserves for homeowners unless required on Automated Underwriting System. 
  • Condotel mortgage lenders will definitely require cash reserves for homeowners.
  • Non-QM Lenders will most likely require it.
  • Jumbo Lenders will most likely require it.

Cash Reserves Required For Portfolio Condotel Financing

A condotel mortgage lender will require on year’s of cash reserves for homeowners.

  • The cash reserves for homeowners include principal, interest, taxes, insurance, homeowner association dues, and other monthly housing fees. 
  • Condotel mortgage lenders require that the cash reserves for homeowners be at least three months in cash and the remaining nine months in liquid assets such as stocks, bonds, and/or retirement accounts.

Cash Reserves For Homeowners Always Recommended Even Not Required By Lenders

For other mortgage lenders, cash reserves for homeowners are normally required but I strongly suggest that homeowners have a cash reserve fund for their own protection.

  • Homeowners who live in the Midwest or places with cold winters can have furnace go out during the middle of winter.
  • These repairs may cost several thousand dollars.
  • Well and septic can break down.
  • These breakdowns can cost thousands of dollars.

Home Inspection

Home inspection is highly recommended. Home Inspections are not required by lenders. However, a few hundred dollars spent on a home inspection is well worth its money.

  • Electrical, plumbing, and heating/air conditioning mechanicals can be quite costly to repair.
  • Home buyers will want to avoid in purchasing a home that have signs of problems with high ticket items. 
  • Appliances and well and septic systems will cost thousands of dollars for repairs. 

How Lenders Require Cash Reserves For Homeowners

Reserves cannot be gifted. It needs to be borrower’s own funds. Again, Automated Underwriting System and/or lenders will require cash reserves from borrowers who pose a higher risk factor. Home Buyers who have further questions on this topic, please contact us at 1-800-900-8569 or email us at gcho@gustancho.com.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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