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.
The "What" and "Why" of Reserves
Mortgage lending guidelines are lumped into three general categories often called the "3 C's", which stand for credit, collateral, and capacity. Reserves fall under capacity and are particularly important for investment property loans because it shows you have the ability to cover mortgage payments when the inevitable vacancy or unexpected expense arises.
Fannie Mae conventional financing is the main game in town for investment property financing these days, and the guidelines require that you document at least 6 months of PITI (principal, interest, taxes and insurance, as well as any HOA fees or mortgage insurance) in reserve funds. You'll need to not only show that you have the reserve funds, but you'll also need to show that you've had them 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.
Planning to Rehab and Rent?
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 review, if you're planning on using conventional financing for an investment property, make sure you have at least 6 months of PITI in the bank somewhere seasoned for at least 60 days. And if you're acquiring a property to rehab and rent, make sure you include the reserves in your numbers when you're doing your due diligence before purchasing the property.
There is a little more involved in investment property financing than for a home you live in, so it's important to plan ahead so the loan process goes as smoothly as possible.
The "What" and "Why" of Reserves
Mortgage lending guidelines are lumped into three general categories often called the "3 C's", which stand for credit, collateral, and capacity. Reserves fall under capacity and are particularly important for investment property loans because it shows you have the ability to cover mortgage payments when the inevitable vacancy or unexpected expense arises.
Fannie Mae conventional financing is the main game in town for investment property financing these days, and the guidelines require that you document at least 6 months of PITI (principal, interest, taxes and insurance, as well as any HOA fees or mortgage insurance) in reserve funds. You'll need to not only show that you have the reserve funds, but you'll also need to show that you've had them 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.
Planning to Rehab and Rent?
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 review, if you're planning on using conventional financing for an investment property, make sure you have at least 6 months of PITI in the bank somewhere seasoned for at least 60 days. And if you're acquiring a property to rehab and rent, make sure you include the reserves in your numbers when you're doing your due diligence before purchasing the property.
There is a little more involved in investment property financing than for a home you live in, so it's important to plan ahead so the loan process goes as smoothly as possible.
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Investors, not sure how to "comp" out properties? Check out my article about how to value real estate so you know you're getting a good deal.
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