Now you need more cash reserves! Break open the piggy bank! Freddie Mac now wants to see a mortgage borrower have even more cash reserves that ever before. Cash reserves is the amount of cash you will have left over after a home purchase or refinance. This is your safety net. Previously most lenders wanted to see at least two month’s of your new monthly payment in reserve after settlement. Your monthly payment is called PITI, or Principal, Interest, Taxes and Insurance. This does not have to be liquid monies in a saving or checking account. It can also be illiquid monies such as stocks, bonds or a retirement account.
The new requirements from FHLMC, which many banks and FNMA are bound to follow to some degree, are as follows:
Borrower(s) must have 6 months PITI in reserves.
Borrower(s) must have 2 months PITI in reserves for subject property. In addition, Borrower(s) must have additional 2 months PITI in reserves for each other financed second home and/or 1-4 unit Investment property in which the Borrower(s) have an ownership interest OR on which the Borrower is obligated.
Investment property (subject property):
Borrower(s) must have 6 months PITI in reserves regardless of whether rental income is used to qualify the borrower(s). In addition, Borrower(s) must have additional 2 months PITI in reserves for each other financed second home and 1-4 unit Investment Property in which the Borrower(s) have an ownership interest OR on which the Borrower is obligated.
Borrower’s current primary residence is pending sale or being converted to a second home or investment property:
Borrower(s) must have 6 months PITI in reserves for the new Primary residence and 6 months PITI in reserves for the current Primary residence pending sale/being converted. The required reserves can be reduced to 2 months PITI in reserves for each of the new primary residence and current Primary residence pending sale / being converted if all of the following requirements are met:
• Value of property pending sale / being converted is supported by a new appraisal with at least an exterior-only inspection that meets Freddie Mac requirements and is dated no more than 60 days prior to Note date (or effective date of permanent financing if new primary residence is a newly constructed home.
• LTV/TLTV/HTLTV for pending sales / being converted is less than or equal to 70%.
Yet again mortgage guidelines are getting more and more strict. As always, it pays to talk to a very seasoned mortgage professional. As it gets harder and harder to qualify for a mortgage, mortgage consumers should become more and more concerned with experience, execution and customer service. Don’t be as focused on getting the best price. Often times, the mortgage provider willing to quote the lowest price, gives the worst service, or has the least knowledge. And in this complicated mortgage lending environment that is a risk you cannot take. Risking an earnest money deposit on a new purchase, or risking a low rate you have locked-in on a refi, does not merit the risk of using an inexperienced or unknown mortgage provider. Be aware of how complicated getting a mortgage has become. Ask a lot of questions up front. And value experience accordingly.