With home prices on the rise, especially in markets like New York and San Francisco, it’s common for mortgage loan amounts to exceed the conforming and high balance conforming loan limits as set by regulation. These loan limits often cap out around $400,000 which proves challenging in more competitive real estate markets where the median home prices start at $1 Million.
This is where the jumbo loan comes into play. A jumbo loan is a home loan that exceeds the loan limits set by regulation. Often lenders are looking for what is called “The Big Three” when it comes to approving a candidate for a jumbo loan – income, assets and credit. But what lenders often neglect to emphasize with their clients is the reserve requirements related to a jumbo loan.
What are Reserve Requirements?
Reserve requirements are assets in your personal accounts that will cover the cost of the mortgage for a specified time. These asset requirements are typically all encompassing of what is called “PITI.”
What is PITI and Why is it Important?
PITI stands for principal, interest, taxes and insurance. When it comes to your reserve requirements the monthly payments you’ll need to prove assets for will include the mortgage principal, interest, taxes and insurance.
The number of months of mortgage payments you’ll need reserves for depends largely on the mortgage provider and the type of home you’re purchasing. If you’re purchasing a property you intend to live in yourself, you may be required to provide the lowest amount of reserves. For a second home or an investment property, a lender may request a few years of PITI to be set aside. Reserve requirement amounts can range anywhere from six months to several years of mortgage payment expenses for a jumbo loan.
What Can I Use For Reserves?
One of the first major requirements for your jumbo loan reserves is that the assets be “seasoned,” typically for at least two months. What does “seasoned” refer to exactly? It means that the money you’re claiming as reserves needs to have been in your personal accounts for an extended amount of time.
If you’re borrowing money from a relative or shuffling large amounts of money from business accounts and the assets have only recently hit your personal accounts, this will raise some red flags with your lender. They want to be sure your reserves were properly sourced and won’t disappear from your account upon closing.
When it comes to reserves it’s all about displaying your habits and patterns. Are you contributing to your reserves with every paycheck? Is the amount going into your reserves on a regular basis reflected in your overall income or are the assets coming from a third party? Lenders want to be sure that you will be able to support the new mortgage with your income and aren’t just borrowing money from somewhere or someone else to inflate your total reserves.
What types of assets can be contributed to my total reserves?
Anything liquid that you have in your accounts will be considered part of your total reserves, but what about non-liquid assets? If you don’t quite meet the reserve requirement with your liquid assets, you can leverage your investment portfolio and retirement accounts to make up the difference.
Lenders do typically discount the value of an investment portfolio or retirement account to around 60 or 70 percent, so you shouldn’t go in expecting that your stocks or mutual funds will be transferred to your reserves at 100 percent their value.
Lenders may also request the terms of withdrawal for any non-liquid accounts. Are the funds easily accessible? What type of penalty will you face with an early withdrawal? While you won’t be required to withdrawal funds from your accounts, the lender will want to know what difficulties you will face if you do have to access the money to pay your mortgage.
What about gifts of money or business funds?
Gifts of money and business funds prove to be a bit of a gray area. Different lenders have varying guidelines and restrictions for using business funds to fulfill your reserve requirements, and will also vary further based on sole-proprietorships, partnerships, S corporations, and C corporations.
Certain types of gifts may cause more issues than others. The lender will always look to see how long the assets have been in your accounts, and where they originated. The type of gifts that will sound an alarm for lenders include cash gifts from someone who is not a relative, from someone that does not provide a gift letter, and any large sum of money transferred into your account that cannot be verified through a paper trail. Lenders will want an explanation and documentation for any large sums of money hitting your account.
What can I do to prepare to apply for a jumbo loan?
It’s critical to have all your ducks in a row long before applying for your jumbo loan. Consulting with a mortgage lender before you even begin your home search can save you some serious headaches when it comes time to apply for your jumbo loan. Here are a few tips to prepare for the jumbo loan application process.
• Make sure your credit score and income is in line with the requirements of your potential jumbo loan.
• Ensure the assets in your personal accounts are properly seasoned and any large sum deposits are backed by proper documentation.
• Calculate your total assets as the sum of your liquid assets, a percentage of your investment or retirement accounts (as determined by your lender), and any gifts or business accounts that have been vetted with your lender.
Acquiring a jumbo loan for your dream home or that next great investment property doesn’t have to be confusing and stressful if you know exactly how to calculate your total assets as they relate to the reserve requirements for your jumbo loan. With a little help from the experts and some preparation on your part, you’ll be ready to sign on the dotted line in no time.
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