This article covers Why Do Mortgage Lenders Ask For Reserves For Borrowers
Gustan Cho Associates has no lender overlays and we never ask for additional reserves unless they are mandated by agency guidelines. Apply Now with Gustan Cho Associates and get qualified with a lender with no lender overlays.
Not all borrowers are required to provide reserves on a home purchase. The main reason why do mortgage lenders ask for reserves is when Automated Underwriting System conditions for it.
Here are cases when the Automated Underwriting System would condition and require reserves:
- Borrowers with under 620 credit scores
- Borrowers with high debt to income ratios
- Borrowers with little to no traditional credit tradelines
- Those with many outstanding collections and charged off account
- Late Payments after housing event and/or bankruptcy
In this article, we will discuss and cover when and why mortgage lenders ask for reserves and what reserves are.
What One Month’s Reserves Consists Of
Reserves are one month’s P.I.T.I.
- principal
- interest
- taxes
- insurance
Reserves cannot be gifted and need the borrower’s own qualified funds. Reserves do not have to be cash. It can be in the form of IRA, Investment Accounts, and 401k.
Reasons Why Underwriters Condition Reserves
Why Do Mortgage Lenders Ask For Reserves:
There are times where Automated Underwriting System (AUS) will not condition for reserves but the individual mortgage underwriter will. Lenders with mortgage overlays can request additional mortgage requirements than those of the minimum mortgage guidelines.
What Are Reserves
Reserves are one month of housing payments that normally consist of principal, interest, taxes, and insurance also referred to as PITI. There are cases where the automated underwriting system will ask borrowers for reserves, especially from mortgage loan applicants with credit scores of under 620. The amount varies from mortgage loan applicant to mortgage loan application 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 underwriter will most likely ask for three months’ reserves. Reserves serve as great compensating factors.
Why Does Automated Underwriting System Ask For Reserves On Some Borrowers And Not Others?
Why Do Mortgage Lenders Ask For Reserves:
- Reserves are 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 need to be the mortgage loan borrower’s own funds
- Reserves do 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 application cannot meet the reserves requirement by lenders. This often causes delays in mortgage loan closings.
- Large and irregular deposits are considered unsourced funds
- Cannot be used in the mortgage world
- All irregular and larger deposits need to be sourced
For example, here is a case scenario:
- can use a $10,000 irregular deposit from a sale of a vehicle as sourced funds and for reserves
- need a copy of the check from the car buyer
- copy of the bill of sale
- copy of the title
- copy of the deposit slip
- after deposit, need an updated bank statement showing the $10,000 deposit
- However, if car seller received cash funds from the auto buyer and just deposited the cash into the bank account, then those funds are not considered sourced funds
- Cannot be used as reserves
The deposit and those funds will not be considered as qualified funds by a mortgage underwriter.
Why Do Mortgage Lenders Ask For Reserves And Solutions
Two options borrowers have with no verified funds for reserves are as follows:
Option one is to wait to get payroll paychecks deposited until meeting minimum reserve requirements.
- As mentioned above, getting gift funds cannot be used for reserves
- So that option is out of the picture
- Can sell certain items
But need proper documentation so the funds will be sourced funds such as the following example:
- selling a vehicle
- selling other large ticket items
Creative Ways Of Showing Reserves
Option two is to add the name to a family member’s bank account as a joint account holder. An account containing seasoned funds such as a checking or savings account.
Here is a case scenario:
- Once name added to a family member or business associates checking or savings account
- After adding the name as a joint account holder, need to get 60 days of bank statement print outs
- Get every page signed, stamped, and dated by the teller reflecting that the reserves have been seasoned for 60 days
- Any large or irregular deposits needs to be addressed
Once the name is added to the other person’s bank account, get 60 days of bank statement print outs:
- Get is signed, dated, and stamped by the bank teller
- Also, need a letter signed and dated by the main account holder stating 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
- Homeowners are free to do whatever they want
Can go and buy furniture, a car, or other high ticket items with the reserves.
Why Do Mortgage Lenders Ask For Reserves: Reserves Are Normally Required For Multi-Unit 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.
If you have any questions about the contents of this article or other mortgage-related topics, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
April 7, 2021 - 4 min read