In areas like the San Francisco Bay Area, where median home prices tend to hover around the million dollar mark, mortgage loan amounts often exceed the conforming and high balance conforming loan limits (respectively, $417,000 and $625,500, in most local metropolitan statistical areas). The ability to offer well-priced, comprehensive jumbo loan programs to meet the needs of buyers in all the regions we service is a necessity here at RPM.
When a borrower or REALTOR® approaches us about a jumbo loan, they often have a fairly strong grasp of what will be required to qualify for a jumbo mortgage in 2015. The home will need an appraisal (or maybe two, in the case of a very large loan) and a buyer’s profile must be strong on what is known as “The Big 3:” income, assets and credit. But, there are also asset reserves to consider – a lesser known, equally important element of a jumbo approval.
What are asset reserves?
To qualify for a home loan, borrowers must have the funds needed for the down payment and closing expenses. To qualify for a jumbo home loan, the borrower may also be required to retain a certain number of months of total monthly housing payment (principal, interest, taxes and insurance, or “PITI”) in reserve. For example, let’s say you’re buying a home with a proposed housing expense of $6,000 per month, and the loan program you desire requires six months of reserves. To qualify for this loan, you’ll have to demonstrate that you have adequate funds for the down payment plus closing costs AND also document that you have an additional $36,000 in assets to cover six months of housing expenses.
What can be used for reserves?
Obviously, anything already liquid will be considered reserves. In the case above, if the buyer is making a $200,000 down payment, with $10,000 in settlement costs, plus the required $36,000 in reserves, a total of $246,000 in assets would be required. If the buyer can document a checking or savings account containing at least $246,000, with 100% of funds usable and accessible, all guidelines will be met.
But more often than not, a buyer may need to utilize investment or retirement accounts to meet the reserve requirements. In those cases, we will typically discount an investment portfolio (non-cash equivalents like stocks and/or mutual funds) to 70% of the value and discount a retirement account to 60% of the vested balance amount. In both of these cases, no liquidation is required, however, you will be expected to provide the terms of withdrawal for any retirement account. We must confirm that in a hardship the funds could be accessed, even at a penalty, to pay the mortgage. Most 401K and IRA accounts will have such terms.
In the cases where all the money may not be coming directly from the borrowers, there could be an option for using things such as gift funds or business funds for reserves. These can prove to be more involved, and their use will be allowed in some cases while forbidden in others. Typical reserve requirements on most programs will range from six months to thirty six months. Fortunately here at RPM we have many strong programs that only require six or nine months, even at higher loan amounts with aggressive loan-to-values.
Assets reserves are a lesser known element of a jumbo loan approval that cannot be overlooked. To learn more about jumbo loan guidelines, gift funds, and other borrowing solutions, contact a loan advisor near you.