This article cover reserves first-time home buyers required by lenders:
Homebuyers generally do not have to worry about reserves unless it is a manual underwrite or they are buying two to four-unit multi-family homes. In this article, we will cover the following topics:
- What are reserves?
- When will a lender require reserves?
- What is a manual underwrite?
- Why do lenders require reserves?
There are times where lenders may have lender overlays and require reserves. This holds true even though the AUS findings may not require reserves.
The Decision of Renters to Become Homeowners
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 homebuyers 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 just for first-time homebuyers. There are times where lenders will require reserves for first-time homebuyers if they have less than perfect credit. Manual Underwriting requires one month 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:
- the home’s monthly principal
- 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 an FHA loan, borrowers must have a minimum credit score of 580 to qualify for 3.5% down payment.
Borrowers 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.
A 5% minimum down payment is required for a home purchase. This is for single-family homes or condominiums. 3% down payment on conventional loans for first-time homebuyers.
Fannie Mae and Freddie Mac define first-time home buyers as those who did not have ownership of a home for the past three years. 15% minimum down payment is required for two-unit residential properties.
Conventional loans require a 620 credit score. Besides the down payment, there will be closing costs.
What Are Closing Costs
Closing costs are any costs and fees incurred in the transaction of the home purchase and/or refinance transaction. This can be either costs and fees that are directly and/or indirectly related to the borrower.
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
- Sellers concession can be used to pay for closing costs
- If the borrower is short to pay closing costs with seller concession, then lender credit by the mortgage lender can be used
FHA allows a maximum of a 6% seller’s concession towards a buyer’s closing costs. Conventional loans require up to a 3% maximum seller’s concession towards a buyer’s closing costs.
Any excess in closing costs needs to go back to the sellers. Homebuyers need to make sure they do not get extra closing cost sellers concessions.
Why Reserves First Time Home Buyers Is Recommend
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 homebuyers need to realize that with home ownership comes financial responsibility. First-time homebuyers can delay buying furniture or other items for their new home.
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 the 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 homeowner’s 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.
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 Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at firstname.lastname@example.org. Gustan Cho Associates 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.
July 7, 2021 - 4 min read