Assets And Reserves
Home buyers applying for a mortgage are going to be asked for assets on their mortgage application. Mortgage lenders will want to know where the down payment and closing costs are coming from and want to see the mortgage applicant’s bank account information as well as all other asset information. Mortgage lenders like to see plenty of assets from the borrower. Assets are considered compensating factors and the more assets the mortgage applicant has to show for, the stronger the mortgage applicant is. All assets needs to have been seasoned for 60 days in order for it to count or needs to be sourced. Cash deposits that cannot be sourced cannot be used. Large irregular deposits needs to be sourced and a letter of explanation needs to be provided. For example, if you made an irregular large deposit for $5,000 from a sale of a vehicle, a copy of the bill of sale, copy of the check, copy of deposit slip, and title will be need to be provided in order for this $5,000 to be counted as part of your assets by the mortgage loan underwriter. If you have mattress money, cash, and cannot source it and is the only source of your down payment and closing costs for your home purchase, the only way you are able to use this cash is to deposit it to your bank account and wait out the 60 days seasoning requirement.
The 60 days seasoning is not a mortgage lender requirement. Mortgage lenders require only 60 days of bank statements to be provided by the mortgage loan borrower and any deposits prior to the 60 days will not be asked. This is the reason if you are intending in buying a property in the near future that you make sure that you have any and all undocumented funds deposited and seasoned in your bank account.
When mortgage lenders talk about reserves, they mean one month’s worth of principal, interest, taxes, and insurance. When a mortgage lender requires reserves and conditions 3 months reserves, they mean three months worth of principal, interest, taxes, and insurance.
Why Do Some Lenders Ask For Reserves?
A mortgage lender will ask a mortgage loan applicant for reserves in cases where the mortgage loan applicant poses high risk. Reserves are considered compensating factors to offset risk factors. Cases where mortgage lenders will ask for 3 months reserves are situations where the mortgage loan applicant has credit scores of under 600 FICO. The Automated Underwriting System can also condition an automated approval for reserves on cases where a higher risk mortgage loan applicant gets an approve eligible. The minimum reserves that is normally asked is 3 months. There are cases where mortgage lenders ask for 6 months reserves.
Portfolio mortgage lenders often request one years reserves for a home purchase. If a mortgage loan applicant already owns a primary residence and want to purchase a second home, portfolio lenders can require one year reserves for the principal main residence PITI as well as one year reserve for the second home purchase’s proposed principal, interest, taxes, and insurance. This is the case with condotel mortgage lenders and non-warrantable condominium mortgage lenders.
Reserve Requirements For Property Types
Single family owner occupied residences are considered the least risky investment for a mortgage lender. For those higher risk owner occupant property buyers, mortgage lenders can condition two to three month reserve requirements. For second/vacation home mortgage loan borrowers, mortgage lenders may require three to six months reserve requirements. For investment home mortgage loan borrowers, the reserve requirement is normally six months.
Conventional loan programs via Fannie Mae and Freddie Mac has reserve requirements based on the mortgage borrower’s credit scores, debt to income ratios, and loan to value. Normally the automated underwriting system will dictate on whether zero reserves is required or 12 months of reserves are required. Whatever the automated findings are, the individual mortgage lender can and often times have their own mortgage lender overlays. The higher the risk a mortgage loan applicant is, the higher the reserve standards are.
For FHA loan programs, there are no reserve standards on properties up to 2 units but 3 to 4 unit properties normally will require at least three months of reserves. VA loans require 6 months or reserve requirements for 3 to 4 unit requirements.