What Are Mortgage Reserves
Reserves are a very curious part of the loan application process. The fact is that most residential borrowers do not need reserves to buy a home, but at the same time it is very smart to have them.
When lenders originate a mortgage, they want as little risk as possible. This is why they have minimum requirements for credit scores and down payments. Its also why they limit the amount of debt you can carry for your particular income.
For less-than-perfect applicants, reserves can make the difference between getting approved and being turned down.
To further decrease their risk, lenders prefer that borrowers have some sort of fallback if things go wrong. For instance, if you lose your job, your income declines or you experience a medical emergency.
The term reserves, simply means cash you can get your hands on fast if you need it.
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This article is intended to provide general information and shouldnt be considered legal, tax or financial advice. Its always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.
A fixed-rate loan of $300,000 for 15 years at 4.875% interest and 5.104% APR will have a monthly payment of $2,352. A fixed-rate loan of $300,000 for 30 years at 5.375% interest and 5.557% APR will have a monthly payment of $1,679. Taxes and insurance not included therefore, the actual payment obligation will be greater. All loans subject to credit approval. Jumbo Loans: Loan amounts greater than $647,200. In AK and HI, the Conforming loan limit is $970,800. The Jumbo rates quoted above are for loan amounts above $647,200 up to $2,000,000.
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Having A Real Estate License
Becoming a licensed realtor may give you an edge as a real estate investor. This approach wont directly save you money on down payments. But it might offer you the chance to score better property deals and save on the cost of agent commissions.
Having a real estate license also gives you access to the MLS. You can use this tool to search for properties and check comps of recently sold homes in the same area. Being a licensed real estate agent also gives you more control over the deal and other perks.
But, getting your license requires an investmentboth of your money and your time. Generally, it takes around 100 hours of studying, coursework, and exams to qualify for your license. Once you get your license, youll need to work under a broker plus complete continuing education classes every year.
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How Much Do You Need In Cash Reserves
The exact amount of cash reserves youll need will depend on your loan type, your credit score, and the amount of your loan versus the purchase price, or the loan-to-value ratio. In most cases, though, lenders will want to see at least a few months of housing payments in liquid assets. The lower your credit score, the higher the reserves a lender will want you to have available.
Investment Property Loan Faqs
This depends on the type of investment property. For SFR rental properties, it depends on your circumstances. If you have strong personal income, good credit, substantial cash reserves, only plan to own one or two rentals, an agency loan might be the right path for you. If you have good credit, an established track record and you’re not looking to grow your portfolio but rather optimize your financing, a bank might be the right choice for you. If you are self-employed and/or looking to grow a portfolio of rental properties, thenan alternative lender, such as Visio, might be your best choice.
The difficulty of obtaining an investment loan depends on the type of loan. Agency loans are going to have more involved requirements than an alternative lender. You should plan on 45-60 days to get a rental property loan. Typically bank loans are the most difficult to obtain followed by agency loans. You should find alternative lenders, such as Visio, the easiest to deal with on your rental loans.
An 80% LTV is considered the best-case scenario for rental property financing, but the more you can put down the better to lower your interest rates and monthly payments.
Most investors have a credit score of 700 or greater. You will find alternative lenders that will consider financing investors with FICO scores of 620 or greater.
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How Much Investment Property Can You Afford
Qualifying for an investment property mortgage involves proving your ability to comfortably manage the monthly payments. Before you make purchase offers, its wise to apply for a mortgage preapproval. This is the most straightforward way to determine how much investment property you can afford to buy.
Once you have a price range, take some time to research the local rental market online. Lenders typically consider 75% of your expected rental income as part of your loan application. This can be done easily if the property was already an investment property and theres a rental history to evaluate. Otherwise, your lender can look at market rents in your area to come up with a reasonable estimation of rental income.
Dont forget to factor in ongoing rental property expenses when figuring out how much you can afford. These may include but arent limited to:
- Landlord insurance
Where To Keep Your Cash Reserves For Your Rentals
Manage your rental property finances using business principles. Do not commingle personal and rental property finances and do not commingle security deposits with operating funds.
I encourage clients to keep 2 or 3 accounts by separating out cash reserves in savings:
- Operating account Some income property owners prefer owning all their properties in one LLC with one operating account, while others create a separate LLC for each property with an operating account for each property.
- Security deposit account Landlords are legally required to keep security deposits in reserve — either pay for damages or unpaid rent when the tenant moves out, or to return to the tenant. Keep them in a separate account to avoid accessing those funds for regular expenses.
- Business cash reserves Consider keeping cash reserves in a separate account, linked to your primary operating account so it is easy to transfer money between them. Keep cash reserves in low risk, liquid savings such as high yield bank accounts, and money market funds. This is definitely not a place to take risk with your money or experiment with stock mutual funds – the money needs to be easy to access and stable in value when you need it.
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Acceptable Forms Of Non
Fannie and Freddie also list other non-employment income that can be used to qualify for a conventional mortgage. Accepted forms of non-employment income include things like child support, interest and dividends, and long-term disability. You can find the full list of acceptable forms of non-employment income here.
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Get Fast & Dependable Investment Property Loans From Visio Lending
Visio Lending is a leading provider of 30-year financing to investors in single-family residential rental properties, including vacation rentals. Visio underwrites its flagship product, theRental360, based on property level cash flow and borrower credit, rather than the borrowers personal income. As a result, the Rental360 is an ideal financing product for the self-employed investor or the investor that is building a portfolio of rental properties.
Key advantages of Visios Rental360 program over conventional loans include:
Visio provides purchase and refinance financing up to 80% LTV. Commonly a customer obtains a cash-out refinance from Visio to purchase or improve another rental property. Since late 2015, Visio has financed more than $2.1 billion in Rental360 loans.
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Reserves By Loan Program
FHA loans that fund one to two-unit properties usually do not require mortgage reserves. Though reserves are necessary if you finance a three- or four-unit property using an FHA loan. Check with your lender to know if its rules differ.
USDA loans do not require reserves on any size property.
VA loans are similar to the FHA loan rule. There isnt a reserve requirement unless you are funding a three- or four-unit property and youre using rental income to qualify.
Conventional loans may require zero or up to six months reserves depending on your debt-to-income ratio, credit score, LTV, etc.
Jumbo loans, again are not conforming, have their own set of rules though you should expect to provide anywhere from three to six months worth of reserves.
What Are The Minimum Reserve Requirements
Determining Required Minimum Reserves
Minimum required reserves vary depending on
- the transaction,
- the occupancy status and amortization type of the subject property,
- the number of units in the subject property, and
- the number of other financed properties the borrower currently owns.
Manually underwritten loans: The minimum required reserves are documented in the Eligibility Matrix. However, when a borrower has multiple financed properties and is financing a second home or investment property, the lender must apply the applicable additional reserve requirements for the other financed second home and investment property transactions.
DU loan casefiles: DU will determine the reserve requirements based on the overall risk assessment of the loan, the minimum reserve requirement that may be required for the transaction, and whether the borrower has multiple financed properties.
If a borrower has multiple financed properties and is financing a second home or investment property, DU will base the reserve calculations for the other financed properties on the number of financed properties determined by DU.
Note: High LTV refinance loans are exempt from the minimum reserve requirements.
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How Much Money Do You Need In Cash Reserves For Your Rental Property
Income property owners need cash reserves for deferred expenses, unpredictable but expected expenses, and the costs of unexpected events:
Vacancies In our rental business, we assume one month vacancy per year per unit in the budget. Over time, we have found that some units rent quickly to great tenants who have always paid on time. Others have remained unoccupied for a few months. You can find rental vacancy rates by region and metro area in the U.S. Census Housing Vacancy Survey.
Late or Unpaid rents While tenant screening can reduce the risk of late or unpaid rent, it happens during good economic times and increases during recessions. Expect late or unpaid rents to continue to increase during the pandemic. The National Multifamily Housing Councils Rent Payment Tracker found that only 76.4 percent of renters had made full or partial rent payments by September 6, 2020.
Planned spending Set aside funds regularly for expenses which are not paid monthly, but can be estimated:
Property taxes If you are not escrowing your property taxes with your mortgage lender, save from each months rent for your payments. If you are a new property owner, use the prior years taxes to estimate until you receive a bill.
Insurance Expect your landlord insurance policy to be about 15-25 percent more expensive that homeowners coverage for a similar property, due to the increased risk of damage when your rent a property to tenants.
How To Build Cash Reserves When You Are Just Getting Started As A Landlord
Build ample cash reserves for a new property before paying anything to yourself or buying another rental property. I encourage income property owners to save all net rents in until you have a full year of building expenses. This can take 18-24 months with your first property if you are starting with zero and do not have alternative sources of emergency funds.
Here is a simple example:
Rent $2000
Monthly share of annual planned expenses: $300
Net to cash reserves: $1000
Annual estimated property expenses: x 12 = $15,600
Months to build target cash reserves: $15,600 / = 22.3
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Why Are Mortgage Reserves Important
Reserves are important because they are there to protect you and the lender in the event of a financial emergency.
If you were to be unable to work due to job loss, sickness, or another emergency, reserves will help you make your mortgage payment.
Buying a home will make a large financial impact on your current savings and your monthly spending. There will be new expenses you may not have had before such as:
- Home maintenance
Having a little cushion saved up will help you prevent being house poor and not having the funds needed to cover your bills.
Should You Flip Or Rent
Should you flip houses or purchase rental properties?
It all depends on your goals, and to what degree you can leverage your skills, expertise and your current financial situation.
In general, house flipping is usually the bigger gamble because these deals hinge on whether property values will rise in the near future. Although price depreciation is never a good thing for property owners, stable and/or falling prices have less impact on someone whose main source of income comes from rents versus a fast resale of a property.
In mid-2017, the highest flipping returns were in Pittsburgh, at 146.6% Baton Rouge, LA, at 120.3% Philadelphia, at 114% Harrisburg, PA, at 103.3% and Cleveland, at 101.8%, according to ATTOM Data Solutions. These cities topped the list because they had lots of affordable, older homes that could be quickly renovated. At the same time, housing prices there were also rising.
For rental properties, the best markets in early 2017 were Cleveland, with an 11.5% annual return Cincinnati, at 9.8% Columbia, SC, at 8.6% Memphis, TN, at 8.5% and Richmond, VA, at 8.2%. The worst markets were generally located in the biggest cities on either coast, where real estate prices have long been sky high.
But local markets are always changing. Like any other type of investment, real estate carries both risks and rewards. You can reduce the risks by thoroughly researching markets and your financing options, but you can never entirely eliminate them.
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Acceptable Sources Of Reserves
The lender is happy if you happen to have the required reserves in cash. For a lot of borrowers, this is a high bar after a down payment and closing costs.
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.
Alternatively, there are some things which may look like liquid assets, but dont count toward reserves, including borrowed money, money from a cash-out real estate settlement, and real estate equity.
Cash Reserve Requirements For Hard Money Loans
If you want to purchase a distressed property to rehab, a traditional lender wont work with you. These lenders only issue loans for ready-to-occupy homes. Instead, youll need to work with a hard money lender to finance the purchase and rehab of a fix & flip property. And for the most part, hard money lenders do not require any cash reserves.
These lenders dont mandate cash reserves as a result of the way they structure their loans. With a traditional mortgage, you receive a single lump sum to purchase a property. For the lender, this makes these loans riskier, because if a borrower defaults, the lender is all in on the deal. Hard money lenders, on the other hand, dont provide their loans in a single sum. They structure them based on draws.
For example, assume a hard money lender agrees to provide you a loan based on a $300,000 after-repair value, or ARV. Of note, the property isnt currently worth $300,000it will be following the rehab period. And most hard money lenders issue loans of 70% LTV based on this ARV. In this case, the hard money loan would total $210,000 .
Furthermore, many hard money lenders will even delay a borrowers repayment schedule. For example, at Do Hard Money, we build five months of payments into all of our hard money loans. This means that investors have a five month buffer to get their deals going before needing to start paying interest.
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Other Cash You Will Need
Remember that your reserves arent the only cash you need to purchase a house. In addition to these funds, youll also need money for your down payment and closing costs. While down payments vary, closing costs can be 3% to 7% of the purchase price.
Finally, even if you have enough cash to cover all your loan requirements, keep in mind that homeownership often comes with unexpected expenses and repair bills. It doesnt hurt to save more to ensure you still have a financial safety net once youve closed on the loan.
Advantages Of Getting An Investment Property Loan Through Griffin Funding
Owning an investment property lets your money work for you. It provides extra income, diversifies your portfolio, increases your net worth, and provides extra insurance against shocks in the market.
Griffin funding is a leading mortgage lender and broker. When you work with us, you get assistance personalized to you from extremely knowledgeable specialists who will secure you a loan at a competitive rate. We make sure that we are transparent the whole way through the process to provide you with excellent customer service.
Need Financial Assistance? See if you qualify for a loan today!See if you Qualify
Need Financial Assistance? See if you qualify for a loan today!
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Can Borrowed Funds Be Used For Reserve Requirements
If the borrowed funds are secured against owned property or vehicle you own, then the answer would be yes.
If the funds came from an unsecured source like a revolving credit card, unsecured credit line, or a family member and were deposited less than the last two months, the answer would be no. To qualify as “seasoned” funds, these deposits need to be two months or longer to be acceptable as mortgage reserves.
