Reserves questions

[laurenleigh]

What is the difference between escrow and reserves?

 

When is it not necessary to have reserves?

 

Can gifts be considered for reserves and if so do they need to be seasoned?

 

I will have some gift money coming to us at the end of next month or so but we are looking to buy in July and the money won't have the "seasoning" needed. However, it will be enough for a few months PITI and downpayment. How to get around this seasoning issue?

 

Our income is enough to qualify and once I completely pay off credit cards and personal loans (hence the reason of no reserves) this month, our DTI will be looking very agreeable.

[liverichly]

"Reserves" have two meanings in relation to mortgages. The first is your liquid reserves, this is the amount of assets (savings, checking, 401k, IRA, CD's, etc.) you have. The second is your escrow reserves, which is only needed if you are choosing to pay your property taxes and/or homeowners insurance in 1/12 installments with your mortgage payment (rather than directly to the insurance company & county treasurer). Since it sounds like you are talking about liquid reserves...

 

Gift funds usually can't be used as liquid reserves, however once it's been in your account for 2 months no one knows if it was a gift or not unless you disclose it, and disclosing the source of funds received in the past isn't a requirement unless the underwriter specifically asks. For example in your situation if you close after the 24th of July the funds would be in there for 2 months, your lender would send your bank a verification of deposit form, and they'd list the current balance & 2 month average, thus you'd appear to have the required liquid reserves.

[laurenleigh]

Thanks. How about downpayment? Can that be gifted?

 

And how much reserves are needed for a $2500 payment?

Edited May 25, 2006 by laurenleigh

[Minnesota]

certain programs allow for gifts...others don't. Usually you can still get a loan with a gift, but your lender might have to get you a different loan program that could result in different rates.

 

Most owner occupied programs look for 2 months of your full payment (PITI) in reserves, though I've seen 3 months be a requirement from time to time (program specific, even credit specific on occassion)

 

Though, there are some programs that require no reserves.

 

We could use some more info on your situation. Down payment, purchase price, credit score.

[hogied]

Thanks. How about downpayment? Can that be gifted? yes. Downpayment and closing costs can be gifted

 

And how much reserves are needed for a $2500 payment? depends on the lender. typically two months for primary residence.

[laurenleigh]

certain programs allow for gifts...others don't. Usually you can still get a loan with a gift, but your lender might have to get you a different loan program that could result in different rates.

 

Most owner occupied programs look for 2 months of your full payment (PITI) in reserves, though I've seen 3 months be a requirement from time to time (program specific, even credit specific on occassion)

 

Though, there are some programs that require no reserves.

 

We could use some more info on your situation. Down payment, purchase price, credit score.

 

The purchase price will be between $350,000 and $370,000

 

Credit score for me is about 680-700 (payed down credit cards to zero, waiting for them to update on CR). DF's credit will not be on the loan (b/c it sucks), only his income. I am the higher wage earner.

 

We may not be getting the downpayment now...the gifter ran into some financial trouble and may not be able to provide the gift. Hopefully their situation will blow over soon (for their sake, not mine).

 

Even without the gift money, we will still have about $5000 for the PITI. I just wanted to put about 5% down to lower the payments a bit. But now I think we are going to go with a 7/1 interest only ARM b/c we're not staying in the house for more that 7 years (more likely 5-6) and I don't think the DC area market will crash in that time . We want to have the smallest payments posibble during that time and put the extra money into investments.

 

Another question. Do lenders go by before taxes or after taxes income?

Edited May 25, 2006 by laurenleigh

[Hammer74]

They go with the gross income, the only hiccup would possibly be your dti.

[laurenleigh]

They go with the gross income, the only hiccup would possibly be your dti.

 

What hiccup with DTI? I thought paying off the credit cards would help my DTI. Did it not make a difference? We make about $110,000/year gross and the minimums on the credit cards only add up to about $400/month. We have two car notes that add up to about $400/month. so we only have about $800/month total. I thought that was good. Now I'm discouraged .

Edited May 25, 2006 by laurenleigh

[liverichly]

I didn't see where you actually listed your other debts, but if you make $9,166.67/mo gross, and you have $5k to spend on your PITI, then that means you have $9,166.67 - $5,000, or $4,166/mo in expenses?

 

Or did you mean after uncle Sam takes his taxes you are left with $5k/mo for living expenses? If so that portion is important to you because that's what you have to budget with, but lenders are not concerned.

 

Edit: Since you only have $800/mo in other expenses your total debt ratio looks to be about 40-42%, usually having no issue to qualify for conforming rates.

Edited May 25, 2006 by liverichly

[hogied]

I didn't see where you actually listed your other debts, but if you make $9,166.67/mo gross, and you have $5k to spend on your PITI, then that means you have $9,166.67 - $5,000, or $4,166/mo in expenses?

 

Or did you mean after uncle Sam takes his taxes you are left with $5k/mo for living expenses? If so that portion is important to you because that's what you have to budget with, but lenders are not concerned.

 

If you don't have any other expenses (or less than $1k) your debt ratio looks good.

 

I think she meant she had 5k for PITI reserves.

[liverichly]

Ah I see/comprehend now. Appears laurenleigh will need more like $6k-$6.5 in reserves to meet the 2 months PITI requirement Fannie & Freddie have, in addition to any funds needed to close.

[heatmisr]

Credit score for me is about 680-700 (payed down credit cards to zero, waiting for them to update on CR). DF's credit will not be on the loan (b/c it sucks), only his income. I am the higher wage earner.

 

 

I see a small hiccup here. You cannot use his income without his scores. Even if you are the higher wage earner, they still use the lowest midscore.

 

Pros, please correct me if I'm wrong.

[liverichly]

You have a better eye than I, and you are correct.... if lauren is planning on using her DH's income (and verify it) his credit will affect the type of loan approval. On the bright side lauren could choose a reduced documentation type, without her DH on the application, which would still allow for a qualifying debt ratio though.

Edited May 25, 2006 by liverichly

[laurenleigh]

VA Loan Guy is right. I have 5k for PITI reserves. I can get another 1.5k if need be. Only 5k will be seasoned for 60 days though, the rest will not be although I will have it at least a month before I want to close (Early August)

 

And I thought I read on here that there are programs that will consider only the higher wager earner's scores. Maybe I read wrong ?

 

See, I thought I was going to have to go Stated or No Doc because I was not a W-2 wager earner until I graduated from college this month and landed an EXCELLENT job with a really good company( mini celebration ). I now want to go as full doc and close to conforming as possible but I if I have to include DF scores to include his income, we will be screwed (he's working with high 400's and low 500's).

[heatmisr]

With his scores that low, you would probably get a better rate going no ratio or no doc by yourself than you would going full doc with him. From what I have learned from reading this board, the magic numbers for mortgages seem to be 580, 640, 680, 720, and 740. Every milestone that you clear score wise, improves your rates. I looks as though you have cleared the 680 hurdle. I'm sure the pro's can give you a reasonable indication as to what kind of rates to expect.

[liverichly]

Yeah if you do a reduced documentation type you could expect rates about 7% on a 30-year fixed 1st and 9% on the 2nd... only about 1/2% higher than full doc. No Ratio documentation types usually require more reserves though, anywhere from 2 to 6 months of PITI depending on the program. This isn't a conforming agency loan but rather an Alt-A one. The fees are the same for these type of loans, unless you want to buy down the rate to where a full doc conforming rate would be.

 

FHA could be an option for a co-borrower who has less that fair credit, but because of your sales price range and husbands low scores I'm not sure if you'd be a good fit.

[laurenleigh]

Well what about the 7/1 interest only ARM? Can I still do that as a no ration or no doc loan?

[liverichly]

Yes you can, the 7/1 ARM rates might be the same as the 30-year fixed rates as ARM rates have been increasing at a more rapid pace than fixed rates... and both of them have interest only options (7/1 ARM for 7 years, 30-year fixed for either 5, 10, or 15 years).