Reserves First Time Home Buyers Required By Lenders


This BLOG On Reserves First Time Home Buyers Required By Lenders Was UPDATED On March 7th, 2019

First Time Home Buyers are often given advice by family members, realtors, friends, and colleagues when they start the home buying process to have reserves for a rainy day:

  • First time home buyers need to consider many factors when they decide in purchasing a new home
  • Just having a minimum down payment and closing costs is not the only factors that are involved
  • First time home buyers should also consider reserves in the event if something might go wrong
  • Many times, lenders do not require reserves first time home buyers
  • However, there are times where lenders will require reserves for first time home buyers if they have less than perfect credit
  • Manual Underwriting requires one month’s of reserves
  • For home buyers buying a three or four unit residential property, there are mandatory reserve requirements
  • For three and four unit home buyers, cash reserves of up to 6 months of the following:
    • home’s monthly principal
    • interest
    • taxes
    • homeowners insurance
  • The above is referred to as PITI

Mortgage insurance premium might be required depending on whether the home buyer is getting a conventional or FHA multi-unit property mortgage loan

Down Payment And Closing Cost Requirements By Lenders

To qualify for a FHA loan, borrowers must have a minimum credit score of 580 to qualify for 3.5% down payment.

  • For those with credit scores between 500 and 579, a 10% minimum down payment is required on a home purchase
  • The Federal Housing Administration (FHA) allows 100% of the down payment to be gifted from a relative or family member
  • For conventional loans, a 5% minimum down payment is required for a home purchase for single family homes or condominiums
  • 3% down payment on conventional loans for first time home buyers
  • Fannie Mae and Freddie Mac define first time home buyers as those who did not have ownership in a home for the past three years
  • 15% minimum down payment is required for two unit residential properties
  • To qualify for a conventional loan, a 620 credit score is required
  • Besides the down payment, there will be closing costs
  • Examples of closing costs are the following:
    • title charges
    • appraisal fees
    • tax and insurance escrows also called prepaid
    • one year insurance premium
    • attorney fees
    • other fees such as recording charges and other fees and costs related to the property purchase
  • Closing costs can be paid with sellers concession toward the buyers closing costs by sellers or lender credit by the mortgage lender
  • FHA allows a maximum of a 6% sellers concession towards a buyers closing costs
  • Conventional loans require up to a 3% maximum sellers concession towards a buyer closing costs
  • Any excess in closing costs needs to go back to the sellers
  • Cannot be given as a cash credit to the home buyer
  • Home buyers need to make sure they do not get extra closing cost sellers concessions

Why Reserves First Time Home Buyers Is Recommended

Reserves For First Time Home Buyers is highly recommended. Most mortgage lenders do not require reserves from home buyers. However, there are instances where the Automated Underwriting System conditions reserves. All manual underwriting will require one month’s worth of reserves by borrowers:

  • There are instances where first time home buyers or home buyers spend every nickel of their savings towards the purchase of their new home
  • They often do not enough money to purchase items for their new home
  • First time home buyers need to realize that with home ownership comes financial responsibility
  • First time home buyers can delay buying furniture or other items for their new home
  • But what happens if emergency repairs are needed
  • With home ownership, owners cannot rely on the landlord to come and fix the furnace, fix the toilet, fix the washer/dryer, or other repairs associated with home
  • Some repairs needed on a home may be minor
  • But there are repairs that are major that homeowners need to be ready for
  • For example, this past winter, the Midwest had a major deep freeze where many homeowners had broken furnaces and busted plumbing pipes from the extreme cold weather
  • These repair can cost several thousand dollars
  • It can impact a homeowners financial situation
  • Without reserves, this can create a major problem
  • Homeowners have worked very hard to have good credit
  • Homeowners do not want to spend mortgage funds towards repairs and are late on a mortgage payment
  • Even though the lender does not require reserves for first time home buyers, having reserves on own is strongly recommended

Qualifying For Mortgage With Lender With No Overlays

Home Buyers who need to qualify for a mortgage with a direct lender with no mortgage overlays can contact us at The Gustan Cho Team at Loan Cabin at 262-716-8151 or text us for faster response. Or email us at Gustan Cho Associates at Loan Cabin Inc. has zero lender overlays on FHA, VA, USDA, and Conventional Loans. We are also correspondent lenders on non-QM loans, bank statement loans for self-employed borrowers, and alternative financing.

This BLOG On Reserves For First Time Home Buyers was updated on March 7th, 2019

Gustan Cho

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