Straight Talk Lending – Cash Reserves
by Tom on September 2, 2009
in Market Musings
Okay, I’ve talked a bit about the rules that have taken effect. Here’s
the first of a series that is going to go through the details of what’s
happening and what to watch for so that it doesn’t trip up your mortgage or the
mortgage of one of your clients.
the first of a series that is going to go through the details of what’s
happening and what to watch for so that it doesn’t trip up your mortgage or the
mortgage of one of your clients.
Today, it’s all about cash reserves. What are cash reserves? It’s
pretty simple:
pretty simple:
Fannie Mae and Freddie Mac want to make sure that you aren’t flat
out broke when you close on your new house.
out broke when you close on your new house.
Seems pretty logical, doesn’t it? Well, yeah, but let me show you what
the old rules were and what the new rules are:
the old rules were and what the new rules are:
The Old Rules: It used to be that if you verified the
balances in someone’s accounts, you’d be fine. You could use 100% of the value
of stock, mutual funds and bonds and you could use 70% of the value of
retirement funds (subtract taxes and penalties for early withdrawal). If the
client is over 59 1/2, then it’s possible to use 100% on retirement funds.
balances in someone’s accounts, you’d be fine. You could use 100% of the value
of stock, mutual funds and bonds and you could use 70% of the value of
retirement funds (subtract taxes and penalties for early withdrawal). If the
client is over 59 1/2, then it’s possible to use 100% on retirement funds.
The New Rules: The new rules require that we use only 70%
of the value of any stock and mutual funds and only 60% of the value of
retirement funds for cash reserves.
of the value of any stock and mutual funds and only 60% of the value of
retirement funds for cash reserves.
So what difference does it make? For the vast majority of people, it’s
not going to make any difference at all. For the vast majority of people,
whether they have $100,000 in their 401K and other investments or $60,000 in
them isn’t going to make a difference.
not going to make any difference at all. For the vast majority of people,
whether they have $100,000 in their 401K and other investments or $60,000 in
them isn’t going to make a difference.
Fannie and Freddie usually like to see 2 months worth of payments in cash
reserves. That means that if your payment is $2,000 per month, they want to
see that you’ve got at least $4,000 in the bank.
reserves. That means that if your payment is $2,000 per month, they want to
see that you’ve got at least $4,000 in the bank.
Now here’s where it could get interesting. You’ve got a client who is a
first time buyer. He’s using all of his savings for the downpayment (3.5%) and
having the seller pay the closing costs. Client has been out of college for
just a couple of years and doesn’t have a lot of money built up in their 401K
plan. Let’s say they are making $50,000 a year and putting 5% into their 401K.
So before the market crashed, they would have had $5,000 in their 401K. Now
they have $3500. Still, that’s more than 2 months worth of payments, so
you’re good, right?
first time buyer. He’s using all of his savings for the downpayment (3.5%) and
having the seller pay the closing costs. Client has been out of college for
just a couple of years and doesn’t have a lot of money built up in their 401K
plan. Let’s say they are making $50,000 a year and putting 5% into their 401K.
So before the market crashed, they would have had $5,000 in their 401K. Now
they have $3500. Still, that’s more than 2 months worth of payments, so
you’re good, right?
Wrong! We’ve got to knock it down by 40% according to the new rules. So
the $3500 number becomes $2100. Payment on the new house is $1250, and you’re
short of the 2 months worth of payments necessary. That could be the
difference between an approved loan and a denied loan.
the $3500 number becomes $2100. Payment on the new house is $1250, and you’re
short of the 2 months worth of payments necessary. That could be the
difference between an approved loan and a denied loan.
Let me restate it slightly differently:
I’ve had a loan, even before the tightening in the last 18 months,
where we had to get a $500 gift from the borrower’s parents to increase cash
reserves so we could actually get the loan approved.
where we had to get a $500 gift from the borrower’s parents to increase cash
reserves so we could actually get the loan approved.
Fannie and Freddie just reduced your client’s cash reserves by
anywhere from 10 to 30% depending on where they had their money. Make sure
that they’ve got it ccovered.
anywhere from 10 to 30% depending on where they had their money. Make sure
that they’ve got it ccovered.
Oh, and if you aren’t working with a lender who tells it like it
is, call me at (616) 292-7559. I’d be happy to talk with you about what it
takes to finance a house in today’s market.
is, call me at (616) 292-7559. I’d be happy to talk with you about what it
takes to finance a house in today’s market.
Stay tuned for more.
Tom Vanderwell
