Lending Guidelines On Mortgage Reserves For Homeowners

Lending Guidelines On Mortgage Reserves For Homeowners

This BLOG On Lending Guidelines On Mortgage Reserves For Homeowners Was UPDATED On February 5th, 2018

First time home buyers will be required to have a down payment and closing costs on home purchase.

  • The amount of down payment required depends on the mortgage loan program
  • FHA requires 3.5%. VA and USDA does not require any down payment
  • Fannie Mae and Freddie Mac require 3% down payment for first time home buyers and 5% down payment for home buyers on Conventional Loans

All mortgage transactions, whether they are purchase and/or refinances, have closing costs. Most home buyers do not have to come up with any closing costs. Closing costs are covered with sellers concessions and/or lender credit. Mortgage Reserves are normally not required by lenders on single family home purchases.

  • However, there are cases where the Automated Underwriting System will condition mortgage reserves
  • This normally happens with borrowers with the following:
    • Lower credit scores
    • Prior derogatory credit items
    • Outstanding collections
    • Charge offs
    • No credit tradelines

When Does Automated Underwriting System Require Reserves

Fannie Mae and Freddie Mac Automated Underwriting System normally does not require mortgage reserves on single family home purchases.

  • Borrowers with descent credit and stable income, mortgage lender will not require any mortgage reserves
  • Reserves are conditioned by AUS on borrowers with less than perfect credit:
    • Recent Late Payments
    • Under 600 credit score borrowers
    • Late Payments After Bankruptcy and/or Foreclosure
    • Outstanding Collections and Charge Off Accounts
    • High Debt To Income Ratio Borrowers
  • Although mortgage reserves might not be required by the mortgage lender, first time home buyers should always have several months of mortgage reserves in the event home needs emergency repairs
  • I will cover some case scenarios where mortgage reserves can be a form of insurance when things can go very wrong

Home Inspection

Most home buyers hire a home inspector and have a home inspection done on the home they are purchasing.

  • A home inspection is highly recommended for all home buyers
  • However, a home inspection is not a home warranty for future potential repairs that owners can encounter with home
  • The home inspector will only inspect the current condition of home
  • Make sure everything is in working condition and there are no imminent faults with the home and its mechanical systems
  • A home inspector does not have a crystal ball and cannot predict the longevity of the furnace, air conditioning units, appliances, well and septic
  • Homeowners insurance does cover major issues such as the following:
    • Fire
    • Vandalism
    • Theft
    • Flood

Homeowners does not cover wear and tear issues related to home such as following:

  • HVAC repairs
  • Well And Septic
  • Appliances
  • Roof Leaks

The above repair items can cost thousands of dollars and homeowners should have reserves.

Reserves Recommended For Homeowners

Home Buyers purchasing a home should have several months of reserves in the event something does go wrong.

  • No matter how great of a shape the home is in, things can always go wrong
  • Homeowners can have a car breaking down where it costs several thousand dollars for repairs
  • This may impact paying mortgage payment on time

Case Scenario Where Reserves Could Have Come In Handy

One of my mortgage loan borrowers has closed on their home last August in Northern Illinois.

  • They were first time home buyers and purchased an older home
  • Like most first time home buyers, they barely met the cost for down payment and closing costs for their home purchase
  • They were so excited on their home purchase that they were both working overtime and side jobs so they can purchase new furniture and remodel their homes
  • Christmas came and went and like most consumers, they maxed out their credit cards
  • As many are aware, the Midwest went through a cold spell with weeks of sub-zero temperatures
  • Unfortunately, their furnace broke down and their pipes in their basement froze and pipes broke
  • The repairs were several thousand dollars and they had no reserves
  • They did not have family or friends who has the $3,000 they needed to do the repairs
  • To top it all, both of their vehicles needed repairs as well
  • They could not have access to their credit cards since they maxed out their credit cards
  • Fortunately, they worked things out by working out payment arrangements with the plumber and HVAC company and got a payday loan

Situations like these does not happen too often but does happen.

  • Being a homeowner comes with responsibilities and you can no longer rely on landlord if home needs emergency repairs
  • Although mortgage lender does not require reserves, you should always have reserves in the event of such emergencies

Lenders Requiring Mortgage Reserves

If the Automated Underwriting System requires mortgage reserves, borrowers need to provide it. Mortgage Reserves cannot be gifted. Down payment and closing costs can be gifted but not mortgage reserves.

One months reserves is equivalent to one month housing payment which are the following breakdowns:

  • Principal
  • Interest
  • Property Taxes
  • Homeowners Insurance

The above is also referred to PITI.

Mortgage Borrowers who need to qualify for mortgage with direct lender with no mortgage overlays can contact us at The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We have zero lender overlays on government and conventional loans. We do not ask for mortgage reserves unless the Automated Underwriting System conditions it. The Gustan Cho Team at USA Mortgage is available 7 days a week, evenings, weekends, and holidays.

By Gustan Cho

www.gustancho.com

Comments are closed.