If you're planning in the near future to purchase or refinance an investment property, be sure you don't forget the reserves! Documenting that you have funds in reserve is an important part of qualifying for an investment property mortgage today, so you want to make sure to plan ahead for it before you apply for a loan.
What Are Reserves and Why Are They Important?
Mortgage lending criteria generally falls into three main categories termed the "3 C's", which stand for credit, collateral, and capacity. Explaining all three in detail is beyond the scope of this article, but it's important to note that reserves fall under capacity, which is concerned with your ability to repay the loan. Lenders want to see that you have cash in reserve for investment property loans because they want to make sure you have money on hand to cover unexpected expenses and vacancies.
Fannie Mae conventional financing is main investment property funding source today, and the lending guidelines require that you be able to show at least 6 months of PITI (principal, interest, taxes and insurance, as well as any HOA fees or mortgage insurance) on hand as reserves. Not only will you need to document your reserve funds, but you'll also need to document that you've had the cash on hand for at least the last 60 days.
If you're planning to refinance a property you've already owned for some time, hopefully you have built up a nice reserve account for improvements and repairs. If you're buying a property, it's important to make sure you have enough cash on hand after the transaction is done to meet the reserve guidelines. Not only will you need to document the funds for a down payment, closing costs, etc., but you'll also need to show you have enough assets to meet the reserve requirements after the loan is complete.
Rehabbing to Rent? Make Sure You Plan Ahead
If you're purchasing a property with hard or private money with the plan to rehab and refinance into a traditional bank loan later, make sure you account for the 6 months reserves when you're running your numbers. In other words, when you're adding up your rehab and finance costs, make sure you leave enough cash left over to meet the reserve requirements for a permanent bank loan. You don't want to find yourself stuck with a high rate hard money loan down the road simply because you didn't plan to have enough cash on hand to get your permanent bank loan completed.
Don't Forget the Reserves!
Again, just to recap, if you're refinancing or purchasing an investment property using traditional Fannie Mae financing, don't forget the reserves! The lender will want to see that you have at least six months of PITI in reserve seasoned for at least 60 days. And if you're acquiring a property to rehab and rent, make sure you account for the reserves in your initial numbers when you're doing your due diligence.
Reserves are an often overlooked part of investment property financing, so make sure you smooth the mortgage processing road by planning ahead.
What Are Reserves and Why Are They Important?
Mortgage lending criteria generally falls into three main categories termed the "3 C's", which stand for credit, collateral, and capacity. Explaining all three in detail is beyond the scope of this article, but it's important to note that reserves fall under capacity, which is concerned with your ability to repay the loan. Lenders want to see that you have cash in reserve for investment property loans because they want to make sure you have money on hand to cover unexpected expenses and vacancies.
Fannie Mae conventional financing is main investment property funding source today, and the lending guidelines require that you be able to show at least 6 months of PITI (principal, interest, taxes and insurance, as well as any HOA fees or mortgage insurance) on hand as reserves. Not only will you need to document your reserve funds, but you'll also need to document that you've had the cash on hand for at least the last 60 days.
If you're planning to refinance a property you've already owned for some time, hopefully you have built up a nice reserve account for improvements and repairs. If you're buying a property, it's important to make sure you have enough cash on hand after the transaction is done to meet the reserve guidelines. Not only will you need to document the funds for a down payment, closing costs, etc., but you'll also need to show you have enough assets to meet the reserve requirements after the loan is complete.
Rehabbing to Rent? Make Sure You Plan Ahead
If you're purchasing a property with hard or private money with the plan to rehab and refinance into a traditional bank loan later, make sure you account for the 6 months reserves when you're running your numbers. In other words, when you're adding up your rehab and finance costs, make sure you leave enough cash left over to meet the reserve requirements for a permanent bank loan. You don't want to find yourself stuck with a high rate hard money loan down the road simply because you didn't plan to have enough cash on hand to get your permanent bank loan completed.
Don't Forget the Reserves!
Again, just to recap, if you're refinancing or purchasing an investment property using traditional Fannie Mae financing, don't forget the reserves! The lender will want to see that you have at least six months of PITI in reserve seasoned for at least 60 days. And if you're acquiring a property to rehab and rent, make sure you account for the reserves in your initial numbers when you're doing your due diligence.
Reserves are an often overlooked part of investment property financing, so make sure you smooth the mortgage processing road by planning ahead.
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Investors, not sure how to run comparables on your deals? Check out my article about how to value real estate so you know you're getting a good deal.
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