Before I begin with the content of this post let me express my gratitude for those that serve in the reserves. Many have been or are to be called to active duty. Thank you for your service to our country.
Reserves as it pertains to a mortgage loan is quite simply how much money do you have left after you satisfy the down payment and closing cost. Reserves are generally measured by a number of months.
If you had to make your payments from your liquid assets how many months could you do this? Many conventional loans have reserve requirements varying by loan to value, occupancy type, debt to income, etc. Your home loan consultant should be addressing this issue with you. FHA does not have specific reserve requirements, but reserves often are viewed as a compensating factor to help strengthen other aspects of your loan application.
Many times, in working with my clients, I sense reluctance from them to share information regarding all of their accounts. This is particularly true when it comes to 401K's. IRA's/Keough's and the like. I believe this is due to the client does not intend to draw upon those funds for down payment and closing cost and therefore does not believe this information is important for me to know.
This brings me to another subject line, always give you loan officer the complete picture. Don't attempt to hide anything, good or bad. We are not the enemy. Having complete information helps us determine the best loan options available for you.
Other than sometimes being required why are reserves important? It helps answer what if questions. What if you lose your job? What if you experience unforeseen medical expenses? What if there is a death? What if there is a divorce? You get the picture. How many months can you hold things together until your life gets back on track?
These assets do have to be verified. Generally speaking, this is done by providing account statements that cover a two month period. For retirement assets only a percentage of the verified assets are considered for cash need for closing and reserves. Conventional lending takes into account 70% while FHA allows for only 60%.
When I reflect back over the last few years I recall far too many times loan approval was granted for borrowers with little or no reserves. I can also recall when the amount of reserves was so important that literally loan approval was determined over a difference of verified reserves of $50.00. The $50.00 made a difference in the number of months of reserves for the borrower.
Reserves are important not just for national security, but also for you economic security and many times for mortgage loan approval.
Jay Williams
252-493-4802
Every industry has its own lingo and anachronism. None more than the government, but that is a discussion for another day. Let's discuss one for the mortgage industry.
PITI: Principal, Interest, Taxes and Insurance. Wouldn't payment be simpler? But you would be surprised how many, especially first time home buyers, don't include property taxes and homeowners insurance in their payment calculations. They go online plug into a mortgage loan calculator and viola; they go cruising around looking for real estate.
A real estate agent shows them property in the chosen price range without verifying they have actually engaged in a mortgage consultation and the home buyer gets excited and wants to make an offer. Tell me you don't do that, please tell me.
By the way, I heard this week there are some lenders on the internet allow the homebuyer to input information and print their own prequalification letter without even talking to a home loan consultant or having a credit report pulled. Do you think they need a second opinion?
Once the taxes and insurance get tacked on all of a sudden the payment is out of their comfort zone, much less can they qualify. The result is a disillusioned prospect. No Sale!
I don't want to escrow; yeah well that's great what are your taxes and insurance going to be because we are using it for qualifying PITI.
The PITI is how your front end debt to income ratio is calculated. The back end ratio calculates your PITI and your other recurring debt payments. Debt to income ratios you ask? More lingo and fodder for another blog.
If you fall under FNMA's or FHA's buy and bail provisions PITI for both properties are utilized in the debt to income ratio computations.
The PITI is also used to figure reserve requirements. Reserves? Look forward to another post coming soon.
Wait a minute, what about Home Owners Association fees? That is included too. Doesn't that make it PITIH? It becomes pitiful when the homebuyer is maxed out with PITI and then we have to add the HOA.
Helping you serve more customers, save time and make more money
Jay Williams
I recently wrote a post on Fannie Mae's buy and bail policy, so I thought it appropriate to address FHA's guidance on the issue.
This guidance is designed to assure the homebuyer can make payments on the full debt service (PITI) for both mortgages when vacating a property and purchasing a new one.
Rental income for the vacated property can not be considered except under two conditions:
•1. Relocations: the homeowner is relocating with a new employer or is being transferred with a current employer. This must be to an area that is not within a reasonable and locally recognized commuting distance.
•2. There is sufficient equity in the vacating residence. The equity position must be 25% or greater.
Required documentation when utilizing the relocation exception:
•· A fully executed lease agreement
•· The lease term must be no less than 12 months from the date of closing for the new residence
•· Evidence that the security deposit and/or first months rent has been paid
Required documentation when using the sufficient equity position:
•· The original purchase price of the vacated property
•· An appraisal that is not less than six months old
If the homebuyer has already been renting the property for at least three months before the date of the application the buy and bail requirements do not apply. In other words they had previously vacated the property and have been renting it for more than three months.
So you may ask, if my client falls under one of these two exceptions how much of the rental income can be used? In my area; Eastern, NC, Pitt County, Greenville, NC, you can use 85% of the rental income. To check your areas vacancy rate click here.
Note you can only use the rental income to offset the PITI of the vacated residence. As an example if 85% of the rental income is $1,500.00 and the payment is $1,200.00 only $1,200.00 in income can be used for qualifying purposes.
There is no mention of reserves as there is under FNMA's buy and bail statement.
To view the FHA Mortgagee Letter click here.
Working to help you serve more customers, save time and make more money
Jay Williams
When I first heard of the buy and bail concept, a few weeks (or was it months, time flies when your having fun) ago, I must confess the first thought that flashed through my mind was "who would do that"?
That initial thought lasted about three seconds before I transitioned to, "Oh yeah, I can see that happening". With declining property values, even people with otherwise good credit as saying "get me out of here". They are purchasing a new property at today's market value and then letting the home that they are underwater on go into foreclosure. What a world we live in, even in little ole Greenville, NC!
Fannie Mae has recently announced their new guidelines for converting a principal residence to a second home or investment property. Buy and Bail!
Complicated, somewhat. I welcome any comments for further clarification.
FHA's Buy and Bail Policy is a bit different
What are reserves you ask? Look forward to additional postings.
Jay Williams
Beginning January 1, 2009 the minimum investment requirement for an FHA mortgage will change. Currently a borrower is required to have a 3.0% minimum cash investment. At least 2.25% of this amount must go toward down payment. The remaining 0.75% could go towards closing cost. As of the first of the year the minimum cash investment will increase to 3.5% all of which must go toward down payment.
What does this mean?
Take for example an FHA buyer is purchasing a home for $150,000. Under the "old rules" the minimum cash investment required would be $4,500.00. Of this amount $3,375.00 was required for down payment and the remaining 1.75% or $1,125.00 the minimum required investment could go toward closing cost.
When the new rules go in to effect on the same $150,000 house the minimum cash investment will become $5,250.00. All of this amount must go towards down payment. This new rule increases the down payment required by $1,875.00, in this example.
Why do we care?
One of the factors of slowing housing sales, in my opinion, has been the restriction of low to no down payment financing. As I have often said, if I can get a customer past credit qualifications and debt-to-income guidelines then invariably the challenge is cash for closing. On the other hand is a customer has ample cash many of the credit issues and debt-to-income restrictions can be overcome.
One of the adjustments we are going to have to make is understanding that for some prospects the buying cycle will be prolonged from what we grew accustomed to. Many of our prospects will need time to save or arrange the additional funds needed for down payment.
What do we need to do?
There are numerous things we can do, but let me mention just a couple.
•Ø Make sure your prospect consults with a reputable mortgage consultant as early in the process as possible. If the prospect is immediately qualified, isn't life grand, go find them a home. If not, the mortgage consultant can advise that prospect what they need to do and determine a time table by which those steps can be accomplished.
•Ø Lead follow up. Database the prospect and develop a marketing campaign until they are ready to buy. You may be surprised, but many potential buyers think they are to work with the agent whose name is on the sign of the home they are considering. If we let the lead go cold we will find out too late they purchased using a different agent/lender.
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Integrity is the cornerstone of my business. I believe a mortgage should be about building relationships, and helping my costumers achieve their home financing goals, not just a transaction.
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