Reserves Requirement On Home Loan By Automated Underwriting System

When Do Underwriters Ask For Reserves Requirement On Home Loan?

When a mortgage loan applicant applies for a residential mortgage loan, the mortgage loan originator will submit the mortgage applicant’s mortgage application and credit reports to Fannie Mae;s and/or Freddie Mac’s Automated Underwriting System for an automated approval.   If it is run through Freddie Mac, then the results will be an approve/eligible per LP FINDINGS.  If it is submitted through Fannie Mae, then the results will render an approve/eligible per DU FINDINGS.  Most mortgage lenders favor Fannie Mae’s Automated Underwriting System.

There are times when the Automated Underwriting System will require reserves.  Reserves they require are monthly payments of the new housing expenses which includes principal, interest, taxes, and insurance.  The Automated Underwriting System may require anywhere between one and six month reserves depending on how weak the mortgage applicant’s credit and financial profile is.

Why Are There Reserves Requirement On Home Loan?

The majority of the mortgage applications, reserves are not required.  However, if the Automated Underwriting System recognizes that a mortgage loan applicant has a weak financial and credit profile, reserves requirement on home loan may be conditioned. Cases where reserves requirement on home loan are conditioned are often when a mortgage loan applicant has very little and no assets and 100% of the down payment is gifted.  FHA allows a home buyer to receive 100% gift funds for their down payment.  Gift funds for down payment is not normally looked at favorably.  The Automated Underwriting System likes to see that the home buyer has some skin in the game where they can have their own money.  If a mortgage loan applicant has 100% gift funds towards their down payment and has $40,000 in a retirement account in his or her own name, then the chances of the Automated Underwriting System requesting gift funds is not likely.  However, if the mortgage loan applicant has credit scores under 600 FICO and no retirement funds or any other account with their own funds, then the likelihood of the Automated Underwriting System conditioning reserves is likely.

Reserves Requirement On Home Loan

As mentioned earlier, reserve requirements vary anywhere between one to six months of the home buyer’s monthly housing payments which includes principal, interest, taxes, and insurance as well as homeowner association dues if applicable.  If the mortgage loan applicant gets 100% gift funds and has poor credit scores, the Automated Underwriting System may require reserves.  Reserves cannot be gifted and needs to be the mortgage applicant’s own funds.  What happens if the mortgage applicant has no reserves?  If you get an automated approval per DU FINDINGS and the AUS conditions reserves, those reserves needs to come from your own funds and cannot be gifted.  If you do not have your own funds for reserves, then your mortgage loan originator can see if he can run LP FINDING, the Automated Underwriting System of Freddie Mac.

Fannie Mae And Freddie Mac Reserves Requirement On Home Loan

Freddie Mac may not require reserves.  Fannie Mae and Freddie Mac has their own sets of mortgage lending guidelines.  If you get conditioned for reserves from both Fannie Mae and Freddie Mac, your mortgage loan originator may downgrade your automated approval to a manual underwrite where the mortgage loan underwriter will manually underwrite your mortgage loan application.  Other creative ways of getting your mortgage loan approved may be by adding your name to a family member’s bank account where it now becomes a joint account with your family member and yourself.  Adding your name to a family member’s account often gives you immediate assets where you can claim that you are a joint account holder and have funds in a separate bank account.

Gustan Cho

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