The New Mortgage Requirement That First-Time Buyers Should Know About
Finding a home in this overheated housing market is tough enough for first-time buyers. But as banks tighten their lending rules, the financing side of buying a home is presenting another set of challenges. Among them? More lenders want to see that you’ve got a stack of cash in savings that’s leftover even after you fork over a down payment and pay for closing costs.
It’s always been common for jumbo mortgage borrowers to be required to prove to lenders that they have sufficient reserves in liquid assets, explains Melissa Cohn, executive mortgage banker at William Raveis Mortgage. (A quick explainer: Jumbo loans, also referred to as non-conforming loans, are mortgages that finance homes that are too expensive to qualify for conforming loans. The Federal Housing Finance Agency sets these standards — the max for a conforming loan in 2021 is $548,250 in most parts of the United States. In more expensive zip codes, the ceiling is $822,375).
But now, Cohn, who has 40 years of experience in the mortgage industry, is seeing similar requirements for some conforming loans, which are popular among first-time buyers. Thanks to the economic uncertainty ushered in by the pandemic, some lenders would like to see that you have enough money in savings to pay your mortgage for three to six months, she says. So, if your monthly mortgage payment is $1,800, they’d want to see $5,400 to $10,800 in reserves.
Reserve requirements — or the money needed above and beyond what’s required for down payment and closing costs — vary from client to client and lender to lender, says Tony Grech, a senior mortgage loan originator with Luxury Mortgage Corp in Michigan. Reserves, he explains, can be considered a “compensating factor” in mortgage decision-making and can add strength to a borrower’s application if there are other weaknesses such as a lower credit score, lower down payment, or a higher debt-to-income ratio.
“The presence of reserves can often turn a loan that would otherwise be denied into one that can be approved,” Grech says. “Generally if I have a loan that is not getting approval, I will test things out to see if one month, two months, or six months of reserves will help — and quite often it does.”
If you’re stuck without a big chunk of change in savings, the good news is lenders can often consider up to 60 percent of the vested balance in 401K/IRA accounts as a reserve fund, Grech says. (You wouldn’t have to take distributions; you’d just need to show that the money is in your account.)
Even though some lenders won’t require proof of a reserve fund, having an emergency savings fund to pay at least three to six months of bills is something that personal finance experts suggest. One way to help shore up the reserve fund is setting aside tax return money or stimulus checks if possible, Grech says.