Heads up for those buying a 2nd home(reserves)

[Anonymous]

Just a heads up, that Fannie Mae has changed some of their lending rules I found out today.  I am in the process of securing a mortgage for a new home for my family.  I bought a small condo 3 years ago and then met my wife/had a kid.  Well we outgrew it, and need a new home.  With the new house, I was still around the 45% backend DTI and was informed today that the new rule is the following;

If the current primary residence will become an investment property and at least 30 percent equity in the current primary residence cannot be documented, or the borrower does not have a two-year history of managing investment properties as evidenced by the most current two years filed and signed Federal IRS 1040 tax returns:
·                        Rental income may not be used to offset the mortgage payment and
·                        Both the current and the new mortgage PITI payments must be used to qualify the borrower for the new transaction and
·                        Reserve Requirements are the greater of:
o                                                Six months PITI for both properties, or
o                                                Standard reserve requirements, or
o                                                Reserve requirements as indicated by AUS (i.e., Desktop Underwriter® DU reserve requirements may be greater than published policy)

Basically, you will need 6 months of payments for current and future property in reserves.  In my case, it was an additional 10 grand I needed to show.  Luckily it can be gifted and we were able to get it, but for those on the fence with this....make sure you have a lot of reserves

60% of your 401k can count as reserves as long as you arent depleting them for the down payment

Hope this helps everyone

[sarahlaila]

Yeah that is what I have been hearing too. We are working on the saving up enough reserves for both mortgages right now. Makes sense when you think about it. I would want to have the several months of payments saved up in case something falls through with a renter.

[clipperskipper]

It's now being referred to as the mortgage triangle, e.g. income, equity, and cash, according to the HARP people.

[ccubedzx3]

I want to make sure I understand this correctly...Is it just principle and interest? or principle, interest, taxes, PMI? this is my current situaiton:

Condo #1-$1070 (principle and interest) $245 (escrow-insurance and PMI) Total: $1315  (current residence, will become our rental)

House #2-$1700 (principle and interest) $ unknown taxes/insurance (currently being built, will become primary residence)

Do I need $1700+$1070  X 6 months....or

 $1700 + $1070 + insurance and PMI X 6 months?

Just want to make sure because we started building yesterday...want to make sure how much money they will expect that I have....

Thanks in advance!

[StartingOver10]

Total payments x 6 including principal, interest, taxes, insurance and PMI. If you have an HOA/condo fee add that in too...

[Anonymous]

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@ccubedzx3 wrote:

I want to make sure I understand this correctly...Is it just principle and interest? or principle, interest, taxes, PMI? this is my current situaiton:

Condo #1-$1070 (principle and interest) $245 (escrow-insurance and PMI) Total: $1315  (current residence, will become our rental)

House #2-$1700 (principle and interest) $ unknown taxes/insurance (currently being built, will become primary residence)

Do I need $1700+$1070  X 6 months....or

 $1700 + $1070 + insurance and PMI X 6 months?

Just want to make sure because we started building yesterday...want to make sure how much money they will expect that I have....

Thanks in advance!

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It is inclusive of Payment, Interest, Taxes, Insurance and HOA

[ccubedzx3]

Thanks everyone for the insightful answer.  To be honest I feel bad for anyone trying to buy a home....heck, even myself.  I think a lot of people get a false sense of hope when they hear of the FHA program and how you "only need 3.5% down"......A lot of people will not expect all the other costs that are needed before you can even close.  Closing costs are on average another 3% of the cost of the loan.  Then this whole need for reserves. 

For instance, my wife and I are buying a home for the Federal Loan Limit of $297,500.   With that number, we need to put a little more than $10,000 for a down payment...but that's not it.  We also would need $9000 for closing, and another $21,000 in reserves.  All in all, we need $40,000 of assets which is an additional $30,000 above and beyond the 3.5% or $10,000....That's a lot of additional money that most people probably do not expect.

[crunching_numbers]

What if you DO HAVE 30% equity in the current home. What type of reserve do you need to show to purchase a second property then? 

What if the second property will not be a rental but a second home? 

[webhopper]

I had to meet this requirement in January. 6 months PITI for my investment property and 2 months of PITI for the new house. Luckily retirement funds DO count.

[Anonymous]

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@crunching_numbers wrote:

What if you DO HAVE 30% equity in the current home. What type of reserve do you need to show to purchase a second property then? 

What if the second property will not be a rental but a second home? 

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If you have 30% equity you'll need the standard reserves on the new house is my understanding.