First Time Home Buyers: Case Scenarios
If you are a first time home buyer, you will be required to have a down payment and closing costs towards your home purchase. However, if you have descent credit and stable income, your mortgage lender will not require any reserves as part of your mortgage approval. Although reserves might not be required by the mortgage lender, first time home buyers should always have several months of reserves in the event your home needs emergency repairs. I will cover some case scenarios where 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 hghly recommended for all home buyers. However, a home inspection is not a home warranty for future potential repairs that you can encounter with your home. The home inspector will only inspect the current condition of your home and make sure everything is in working condition and there are no imminent faults with the home and its mechanicals. 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 fire, vandalism, theft, and flood but does not cover wear and tear issues related to the phone.
Reserves Recommended For Homeowners
If you are purchasing a home, you should have several months of reserves in the event something does go wrong. It does not have to do anything with your home. You can have a car and the car breaking down where it costs you several thousand dollars for repairs where it may impact you paying your 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 had enough for the 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 of you 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 your landlord if your home needs emergency repairs. Although your mortgage lender does not require reserves, you should always have reserves in the event of such emergencies.
By Gustan Cho