This BLOG On Mortgage Reserves Guidelines On Home Purchase And Refinance Was UPDATED On January 29th, 2019
First time home buyers will be required to have a down payment and closing costs on a 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
- 5% down payment for home buyers on Conventional Loans
In this article, we will cover and discuss when reserves are required by lenders.
Closing Cost On Home Purchase And Refinance Transactions
All mortgage transactions, whether they are purchase and/or refinances, have closing costs. Most homebuyers 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 Mortgage Reserves
Fannie Mae and Freddie Mac Automated Underwriting System normally do not require mortgage reserves on single-family home purchases.
- Borrowers with decent credit and stable income, the 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:
- This is due 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.
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 the home
- Make sure everything is in working condition
- Make sure there are no imminent faults with the home and its mechanical systems
- A home inspector does not have a crystal ball
Inspectors cannot predict the longevity of the furnace, air conditioning units, appliances, well and septic.
What Does Homeowners Insurance Cover
Homeowners insurance does cover major issues such as the following:
Homeowners do not cover wear and tear issues related to home such as following:
- HVAC repairs
- Well And Septic
- Roof Leaks
The above repair items can cost thousands of dollars and homeowners should have reserves.
Mortgage 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 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 the down payment and closing costs for their home purchase
- They were so excited about 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 have 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 do not happen too often but do happen.
- Being a homeowner comes with responsibilities and you can no longer rely on the landlord if the 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 month’s reserves are equivalent to one-month housing payment which are the following breakdowns:
- Property Taxes
- Homeowners Insurance
The above is also referred to as PITI.
Mortgage Borrowers who need to qualify for a mortgage with a lender with no mortgage overlays can contact us at Gustan Cho Associates 800-900-8569 or text us for faster response. Or email us at firstname.lastname@example.org. We have zero overlays on government and conventional loans. We do not ask for mortgage reserves unless the Automated Underwriting System conditions it. Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.
January 29, 2019 - 4 min read