Your income and asset picture is important to the homebuying journey. Lenders want to make sure you have stable, reliable income that’s likely to continue.
Generally, there’s no minimum dollar amount you need in the bank to start the homebuying process. But lenders will be on the lookout to make sure you can financially handle the new mortgage payment and the costs of closing on the loan.
In some cases, you may need a certain amount of cash reserves to satisfy lenders. A solid stockpile of documented funds can also serve as a “compensating factor” to help buyers overcome other potential deficits or issues with their loan file. Policies and guidelines will vary by lender, loan type and other factors.
Lenders typically think of reserves in the context of your monthly mortgage payment. You may need to have a certain number of months’ worth of mortgage payments in the bank, to include the principal, interest, property taxes, homeowners insurance (and homeowners association dues when applicable).
Here’s a look at a few situations that might require prospective VA buyers to have reserves on hand.
Reserves for Jumbo VA Loans
VA buyers seeking a jumbo loan may need to meet reserve requirements. A jumbo loan is a loan in excess of the current $453,100 conforming loan limit in place throughout most of the country.
At Veterans United, we currently require jumbo borrowers to have the greater of two months of reserves or the number determined by the automated underwriting system used to evaluate your loan file. For example, if your jumbo loan carries a monthly mortgage payment of $2,000, then you could need at least $4,000 of documented assets.
Reserves must be in the borrower’s name and can’t be a gift. But lenders may be willing to count a percentage of your retirement account as reserves.
Veterans United currently counts up to 60 percent, provided the borrower can access the funds prior to their actual retirement. Some pension plans are only accessible once the person retires or quits their job.
Using Rental Income
Buyers looking to purchase a multiunit property and count projected rental income toward loan qualification will typically need to have a two-year tax history as a landlord. Many times they’ll also need cash reserves. In these situations, Veterans United currently requires six months’ worth of mortgage payments in reserves.
The same is typically true for buyers who want to count income from an existing rental property they never occupied. You’ll often need cash reserves and to be able to document a two-year history of receiving rental income. We currently require three months’ reserves in these cases.
Borrowers may also need to have cash reserves if they’re more than 12 months removed from converting a primary residence into a rental property.
Talk with lenders about their policies and guidelines.
Borrowers may be able to strengthen their loan file with “compensating factors.” These can vary by lender, loan type and other factors, but they’re generally positive attributes that can help convince underwriters you’re a safe bet.
For example, lenders may be willing to extend their cap on debt-to-income ratio for borrowers with one or more compensating factors.
At Veterans United, we currently consider having four months’ of reserves after closing as a compensating factor. Borrowers may be able to count regular debt payments to supplement any shortfalls.
For example, a borrower with a $1,000 monthly mortgage payment would need $4,000 in reserves to qualify for a compensating factor. But if information from the credit bureaus shows the borrower makes $1,000 per month in debt payments, then they can proceed with just $3,000 in reserves.
Additional payments can be considered as a compensating factor provided they occurred within the previous 120 days.
Talk with a Veterans United loan specialist at 855-259-6455 for more details.