Reserves Requirement On Home Loan By Mortgage Lenders

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This BLOG On Reserves Requirement On Home Loan By Mortgage Lenders Was UPDATED On February 16th, 2019

When Do Underwriters Ask For Reserves Requirement On Home Loan?

Reserves Requirement On Home Loan is normally not required. Reserves are highly recommended for home buyers even though it is not conditioned by mortgage lenders. When a borrower applies for a home loan, the mortgage loan originator will submit the applicant’s mortgage application and credit reports to Fannie Mae’s and/or Freddie Mac’s Automated Underwriting System for 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 lenders favor Fannie Mae’s Automated Underwriting System

Reserves Requirement On Home Loan By AUS

There are times when the Automated Underwriting System will require reserves.

  • Reserves they required by lenders are monthly payments of the new housing expenses
  • Reserves are one month’s principal, interest, taxes, and insurance (PITI)
  • The Automated Underwriting System may require anywhere between one to six-month reserves
  • The amount of reserves requirement on home loan depends on how weak borrowers financial profile is
  • Reserves Requirement On Home Loan is also mandatory on multi-unit home purchases

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 borrowers with weak financial and credit profile
  • Reserves requirement on home loan may be conditioned for weaker credit profile borrowers
  • Cases where reserves requirement on a home loan is conditioned on the following types of borrowers:
    • has very little and no assets
    • down payment is 100% gifted
    • borrowers with outstanding collections and charged off accounts
    • borrowers with late payments after bankruptcy and/or housing event
    • home buyers buying 2 to 4 unit properties

How AUS View Gifted Funds For Down Payment

  • FHA allows a home buyer to receive 100% gift funds for their down payment
  • Gift funds for down payment are not normally looked at favorably by Automated Underwriting System
  • The Automated Underwriting System likes to see that the home buyer has some skin in the game where they can have their own money
  • Borrowers with 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 reserves is not likely
  • However, if borrowers have credit scores under 600 and no retirement funds or any other account with their own funds, then the likelihood of the Automated Underwriting System conditioning reserves is likely

When Reserves Requirement On Home Loan Is Required By AUS

As mentioned earlier, reserve requirements vary anywhere between one to six months. One month’s reserves are one month of 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
  • Reserves need to be the mortgage applicant’s own funds
  • What happens if the mortgage applicant has no reserves? 
  • Borrowers with automated approval per DU FINDINGS and the AUS conditions reserves, those reserves need to come from own funds and cannot be gifted
  • Borrowers who do not have own funds for reserves, then mortgage loan originator can see if he can run LP FINDING, the Automated Underwriting System of Freddie Mac
  • There are times when Fannie Mae conditions for reserves and Freddie Mac does not and vice versa

Fannie Mae And Freddie Mac Reserves Guidelines

Freddie Mac may not require reserves.

  • Fannie Mae and Freddie Mac have their own separate guidelines
  • Borrowers conditioned for reserves from both Fannie Mae and Freddie Mac mortgage loan originator may downgrade automated approval to a manual underwrite
  • Manual Underwriting is where the mortgage underwriter will manually underwrite mortgage loan application

Creative Solutions To Reserves Requirement On Home Loan

  • Creative ways of getting reserves may be by adding borrowers name to a family member’s bank account
  • It now becomes a joint account with a family member and yourself
  • Adding a name to a family member’s account often gives immediate assets where you can claim is a joint account holder and have funds in a separate bank account

Reserves are recommended for home buyers. Being homeowners is a huge responsibility. Homeowners no longer can depend on landlords for repairs. Maintenance costs money. However, in the event HVAC system breaks down or appliances break down, these are high-cost repairs. Although lenders do not ask for reserves, always put away a portion of income aside for reserves in the event of an emergency.

Gustan Cho

www.gustancho.com

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