Posted 3 years, 6 months ago

When you apply for a home loan, we will ask you to provide documentation that verifies both your income and assets.  As your lender, we want to review your income to ensure you can afford your monthly housing expenses.  Additionally, we want to verify that you’ve saved enough to cover the down payment and closing costs.  We are also concerned with your “reserves” which is the amount of money that you’ll have after paying your down payment and closing costs.  For example, if your total housing expenses (mortgage payment, property taxes, homeowner’s insurance, mortgage insurance and HOA dues) are $2,500 and you will have $10,000 in assets after closing, then you would have 4 months’ worth of reserves ($10,000 / $2,500 = 4 months' reserves).

Why are reserves necessary?

Reserves are important because they demonstrate your capacity to save and, perhaps more importantly, your ability to continue making your mortgage payment in the event of a job loss or other financial emergency.  Statistically, borrowers with more reserves are less likely to default since they have savings available to cover the mortgage payment and other housing expenses.

How are reserves calculated?

Your reserves are calculated by first determining your total liquid assets (checking, savings, money market, CD, mutual fund, brokerage account etc.).  Funds in retirement accounts such as 401Ks and IRAs will also be factored, but we may use only a percentage of these funds.  Once your total liquid assets are determined, we’ll subtract your total closing costs and down payment, as applicable, to determine your actual reserves.

How many months of reserves are required?

The amount of reserves you’ll need  will depend on a few different factors including  property type (i.e. single family residence, condo, 2-4 unit), occupancy type (i.e. primary residence, second home, investment property) and type of transaction (i.e. purchase, rate and term refinance, cash out refinance).  Reserve requirements will typically range from zero to six months. 

Conclusion

It’s important to plan ahead when applying for a new home loan to ensure that reserves are not an issue.  Reserves requirements can vary widely based on the type of transaction and conditions will may apply if money has been shuffled around and/or any assets have been gifted.  Please call us or reply to this email if you’d like to learn more about reserves and how they will pertain to your specific transaction.    

Sincerely,

-The Kavanewsky Team