What Are Reserves And Why Do Mortgage Lenders Ask For Reserves?

Why Do Mortgage Lenders Ask For Reserves

Gustan Cho Associates

Why Do Mortgage Lenders Ask For Reserves:

Reserves are one month of housing payments that normally consist of principal, interest, taxes, and insurance, also referred as PITI.  There are cases where the automated underwriting system will ask for the mortgage loan borrower for reserves, especially from mortgage loan applicants with credit scores of under 620 FICO.  The amount varies from mortgage loan applicant to mortgage loan applicant but the automated underwriting system may require anywhere between one month of reserves ( PITI ) to up to six months in reserves depending on the income and profile of the mortgage loan applicant. Mortgage loan files that go through manual underwriting, the mortgage loan underwriter will most likely ask for three months reserves. Reserves serve as a great compensating factor.

Why Does Automated Underwriting System Ask For Reserves On Some Borrowers And Not Others?

Why Do Mortgage Lenders Ask For Reserves: Reserves is not requested for all mortgage loan applicants.  Reserves are normally requested for mortgage loan applicants who might have been short term on the job, high debt to income ratios, prior bad credit, or poor financial profile.  You can gift funds for the down payment on a home purchase from a family member or relative.  100% of gift funds can be used towards the down payment of a home purchase.  However, gift funds cannot be used as reserves.  Reserves needs to be the mortgage loan borrower’s own funds.  Reserves does not have to be in cash.  401k, IRA, retirement accounts, investment accounts, can all be used as reserves.  However, if you are using a 401k or retirement funds for reserves, only 60% of the value of the 401k or retirement funds can only be used for reserves.

What If I Don’t Have Reserves?  What Are My Options?

There are many cases where the mortgage loan applicant cannot meet the reserves requirement by the mortgage lender and this often causes delays in mortgage loan closings.  Large and irregular deposits are considered unsourced funds and cannot be used in the mortgage world so all irregular and larger deposits needs to be  sourced.  For example, you can use a $10,000 irregular deposit from a sale of a vehicle as sourced funds and for reserves as long as you have the copy of the check that you got from the car buyer, copy of the bill of sale, copy of the title, and copy of the deposit slip as well as the updated bank statement showing the $10,000 deposit.  However, if you received cash funds from the auto buyer and just deposited the cash into your bank account, then those funds are not considered sourced funds and cannot be used as reserves and that deposit and those funds will not be considered by the mortgage loan underwriter.

Two options you have when you do not have reserves are as follows:

Option one is to wait until you get your paychecks deposited until you meet the minimum reserve requirements.  As mentioned above, getting gift funds cannot be used for reserves so that option is out of the picture.  You can sell certain items but need proper documentation so the funds will be sourced funds such as the example of selling a vehicle or other large ticket items.

Option two is to add your name to a family member’s bank account as a joint account holder of a checking account or savings account.  Once you add your name to a family member or business associates checking or savings account, you need to get 60 days of bank statements reflecting that the reserves have been seasoned for 60 days and any large or irregular deposits needs to be addressed.  Once you added your name to the other person’s bank account, get 60 days of bank statement print outs and get is signed, dated, and stamped by the bank teller.  You also need a letter signed and dated by the main account holder stating that you have full access to the bank account.  This option works all the time.

Why Do Mortgage Lenders Ask For Reserves And Are Reserves Enforced After Closing?

Reserves are not enforced by the mortgage lender after the home closing.  Whatever happens after closing is no longer the mortgage lender’s business and you are free to do whatever you want.  You can go and buy furniture, a car, or other high ticket item with the reserves.

Reserves Are Normally Required For Multi-Unit Properties And Investment Properties

3 to 6 months of reserves may be required for 3 to 4 unit properties as well as for investment properties.  It does not matter how great of a credit profile or financial profile a mortgage loan applicant has.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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