One of the great curiosities of the VA loan program is that you can get a mortgage with little or no cash. The VA allows lenders to make loans with no money down, a huge cash savings for qualified borrowers.
In the usual case VA borrowers only need cash for closing costs and points or any difference between the loan amount and the purchase price. VA loans without cash are a practical reality in situations where a seller or builder is willing to fund all closing costs.
Beyond that, explains the government, the “VA does not require the applicant to have additional cash to cover a certain number of mortgage payments, unplanned expenses, or other contingencies.”
The intent of the VA is surely positive. It wants to make mortgage insurance available for every qualified vet and military household. But the reality is that cash is important because every household needs reserves for those uncomfortable moments when the car fails, a surprise expense arises or the furnace gives out.
In fact, there’s also a hint that while cash reserves are not required, strong assets help with loan applications. When underwriters are evaluating loan applications, says the VA, it’s important to consider the “ability of the applicant and spouse to accumulate liquid assets; such as cash and bonds.”
The catch is that saving and accumulating reserves is not easy. A new report from the Center for Responsible Lending points out that “after households pay for housing, utilities, food, health care, debt payments (not including mortgage or auto payments), and other expenses, the typical U.S. family has just $100 left each month. This is enough, perhaps, to meet their expected monthly obligations, but not nearly enough to manage a major unexpected expense or to save for college, retirement, or a down payment for a home purchase.”
So how much is enough? When it comes to basic financial planning a good starting goal would be savings equal to wages and income for three months. Such savings should be in a liquid form so the money is instantly accessible in case of emergency.
For those who have run into financial difficulties such as a short sale or foreclosure the better approach is to accumulate savings which equal wages and income for at least six months. The reason to do this is to show lenders that while in the past there were financial problems you have now recovered, are able to save and can prove it with a healthy bank balance.
While size and accessibility are important another issue to consider is seasoning. Lenders would like to see that savings have been in place well before a loan application is undertaken, say three or four months before seeking a mortgage.
It is true that saving is enormously difficult, especially in today’s tough economic times. But the alternative is fairly gruesome, an inability to deal with the financial emergencies which inevitably arise. Protect your interests, develop a budget and stick money in an account where it’s safe, insured, interest-bearing, and available when you need it.
Photo courtesy born1945