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Mortgage Reserves

What Are Mortgage Reserves?

Mortgage Reserves are a very important part of the loan approval process.

When lenders consider approving a mortgage application they want as little risk as possible. This is why they have minimum mortgage reserve requirements. To decrease their risk, lenders prefer that buyers have some sort of “fallback” if things go wrong. For instance, you lose your job or your income declines. The term “mortgage reserves,” simply means funds you can get your hands on fast if you need it.

When Do You Need Mortgage Reserves?

You typically don’t need reserves when purchasing a primary residence. But if your credit score is a little low or if you’re purchasing a second home, a multi-unit property, or investment property, you most likely will need them.

Calculating Mortgage Reserve Requirements

Liquid reserves are financial assets that are available after a loan closes. Reserves are calculated based on the total amount of liquid assets remaining after the loan transaction closes divided by the total monthly housing payment amount, including, principal and interest, property taxes, property insurance, mortgage insurance, flood insurance and any association/condo association dues.

Let’s say that your total monthly housing costs will be $1,000. If the lender says you need two months reserves you must have $2,000. If your monthly housing cost is $1,500 then you would need $3,000.

The good news is that lenders see liquid assets as anything that can be quickly converted into cash including stocks, bonds, mutual funds, the cash value of an insurance policy, accessible retirement funds, and certificates of deposit.

Will Borrowed Funds Count Towards Reserves?

They will if the borrowed funds were secured against a property or a vehicle that you own. If the funds were from an unsecured source, like a credit card, unsecured credit line or from a family member and were deposited within the last 2 months then they won’t be considered as eligible mortgage reserves. If they were deposited over 2 months ago then they will be considered “seasoned funds” and be acceptable as mortgage reserves.

Will Gifted Funds Count Towards Mortgage Reserves?

Freddie Mae and Freddie Mac conventional mortgages along with FHA and VA loans will allow gift funds to be counted towards mortgage reserves.

Compensating Factors

Mortgage Reserves, even when reserves are not required to officially qualify for a home loan, they can serve as a compensating factor for marginal applicants. As an example, VA and FHA say, compensating factors may affect the loan decision and these factors are especially important when reviewing loans which are marginal with respect to residual income, low credit scores or high debt-to-income ratios.

Have you been turned down for a Florida Mortgage Loan Because?

Not to worry our Loan Officers overcome these problems all the time, we know the Florida Mortgage Business and can Close Easy, Complex and Tough Deals. We do this by utilizing our “Outside The Box Thinking” to get you pre-approved for the maximum loan amount possible while keeping your down payment and closing costs as low as possible. Don’t just take our word for it, check out what our prior clients have to say about us!

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