Whether or not you believe that the United States presently has a “border crisis,” I’m sure most of us take comfort in the fact that our country can rely on its reservists to step in where and when needed and lend additional support to our nation’s active military. And it’s not too much unlike this in the lending industry when a borrower seeks to obtain some kinds of mortgages — especially jumbo loans, which have amounts that exceeds the conforming loan limits in any area.
The active military of any loan qualification, in our example above, would be the paystubs, bank statements, tax returns, credit report and other fundamentals that lenders use to determine any borrower’s creditworthiness. But behind that front line, a secondary layer of qualification requirements includes asset reserves, which document and demonstrate that the buyer/borrower has a resource, outside of his regular income stream, from which to make the mortgage payments. Obviously, we all hope to never see our own personal version of some real or imagined border crisis, and our reserves deployed, but when a bank considers making a jumbo mortgage to us, it wants to know the reserves exist.
How Do Reserves Work?
Presently, when you attempt to qualify for a jumbo home loan, in addition to the funds needed for your down payment and closing expenses, the lender will require that you, the borrower, retain a certain number of months of total monthly housing payment (principal, interest, taxes and insurance, or “PITI”) in reserve. So, let’s say you’re buying a home and the proposed housing expense will be $6000 per month. Let’s also say that the loan program you desire requires six months of reserves. To qualify for this loan, you’ll have to demonstrate that you have adequate funds for down payment plus closing costs THEN also document that you have an additional $36K in assets, somewhere and somehow.
What Can Be Used for Asset Reserves?
Great question! Obviously, any funds that are already liquid can go towards the reserve requirement. In our case above, if the buyer was making a $200K down payment and had $10K in settlement costs, plus the $36K in reserves, and could document a checking or savings account with $250K, everything would meet guidelines. A total of $246K in assets would be required, so we’d be $4000 above that need with 100% of the balance in these accounts accessible.But more often than not, we’ll need to recruit (hardy har) investment or retirement accounts to meet the reserve requirements. In those cases, know that a jumbo lender will typically discount an investment portfolio (non-cash equivalents like stocks and/or mutual funds) to 70% of the value and discount a retirement account to 60% of the vested balance amount. In both of these cases, no liquidation is required, however, we will be expected to provide the terms of withdrawal for any retirement account. The lender will want to know that in a hardship the funds could be accessed, even at a penalty, to pay the mortgage. Most 401K and IRA accounts will have such terms.
What Funds Are Not Allowed to Be Used As Reserves?
In the cases where all the money may not be coming directly from the borrowers, be certain to check with us about using things such as gift funds or business funds for reserves. These can prove to be more involved, and their use will be allowed in some cases while forbidden in others. And for your general knowledge, typical reserve requirements on most programs will range from 6 months to 36 months. Important to note, assets such as bitcoin, or assets held in foreign banking institutions are most often NOT an acceptable source of reserves.
If you have questions about how to calculate the reserve requirement, which loan scenarios require reserves and what funds can be used to meet a reserve requirement, give me a call any time. We’re ready to mobilize our troops and fight for your success.
Vice President of Mortgage Lending
Cell/Text: 415-367-5959 Fax: 415-366-1590
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.
Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283