When a buyer plans for the purchase of a home, whether it is a primary home, a vacation home or an investment property, some tend to forget one thing in their figures, that is a reserve.
The buyer works with the real estate agent on the price and the mortgage professional on the mortgage program and interest rate, plus the down payment needed and the costs involved for the closing, but most buyers do not plan on or even know about a reserve requirement.
Basically, a reserve is the amount of cash or cash equivalents available to the borrower after the purchase of the real estate has been completed. This reserve is required by almost all mortgage investors and can have a wide range.
Before I go into the amount of reserves needed, I need to explain a couple of things. First, cash is cash, which is money in the bank or credit union. Cash equivalents are items such as stocks, bonds, IRA accounts or 401k accounts. All of these items have a cash equivalent.
The second thing you need to know is having a reserve is for the protection of the mortgage investor. The example I use to explain why a reserve is necessary is simple: You buy a new home, to celebrate you take a day off after moving into the new home and you go skiing, boarding or mountain biking. You fall and break your leg into a bazillion pieces and you will be off work for three months. The mortgage investor wants to know that if some disaster occurs you have access to some cash to make the payments until you get back on your feet and working again.
Now, on to how much of a reserve do you need? It depends upon the mortgage program, the mortgage size and even your credit scores. If you are borrowing a high percentage of the purchase price, the mortgage investor may require as much as six months of your total payments be in a reserve account. Even though the account is still in your name and the investor is not asking for you to place it in some joint account, they just like to know that you do have access to the asset.
If you are borrowing a large amount, let's say in excess of $1 million, the investor may require that the reserve be in the neighborhood of six months of your gross annual earnings. If you have credit scores that are right on the low end of the program requirements, the reserve may be four to six months of the mortgage payment.
So as you can, see there is no one simple answer. I always suggest that you meet with your mortgage professional early on to learn what will be expected of you as the borrower and how to achieve that goal. It may require little to no effort on your part or it may require getting that planned gift from a relative now and holding it in a reserve account for six months before you make an offer on the piece of real estate.
So plan ahead and you will find that the purchase of real estate and getting a mortgage is not that difficult. In fact, you may find out that with some preplanning the process is simple, easy and one that you should have done years ago.
For answers to your mortgage related questions call Bob Kieber at (970) 453-4700 or email him at email@example.com. Bob is a local mortgage lender with Centennial Bank. He has 30-plus years of professional experience in real estate, finance and investments, and is a longtime resident of the High Country. Member FDIC, Equal Housing Lender. NMLS Bank #401640 Broker #289610. For tax benefit information please consult with a professional tax advisor. The opinions expressed are those of the individual, and do not necessarily reflect those of Centennial Bank.