If you're planning on using a traditional bank or mortgage company to finance an investment property in the near future, whether you're refinancing or purchasing, make sure you don't forget the reserves! Documenting reserve funds is an essential part of qualifying for investment property financing these days, so you want to make sure you have them lined up before you get the ball rolling on a new loan.
Why Do I Need 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.
Conventional Fannie Mae financing is the primary funding source for investment property loans these days, and the guidelines stipulate that you have 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 show you have that much cash on hand, you'll also need to show that you've had it for at least 2 months.
If you're refinancing a property you've owned for a while, hopefully you've built up a cash cushion for repairs and improvements that you can use for reserves. However, if you're purchasing a new property, you need to make sure you have adequate reserves once the transaction is done. In other words, you not only will need to document funds for your down payment and closing costs, you'll also need to show that you have enough cash left over to meet the reserve requirements once 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, to recap, if you're financing an investment with a traditional bank loan, make sure you have 6 months of PITI sitting in the bank, seasoned for at least two months, to meet the Fannie Mae reserve requirements. If you're rehabbing with the plan to refinance into a traditional bank loan later, make sure you account for the reserves ahead of time.
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.
Why Do I Need 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.
Conventional Fannie Mae financing is the primary funding source for investment property loans these days, and the guidelines stipulate that you have 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 show you have that much cash on hand, you'll also need to show that you've had it for at least 2 months.
If you're refinancing a property you've owned for a while, hopefully you've built up a cash cushion for repairs and improvements that you can use for reserves. However, if you're purchasing a new property, you need to make sure you have adequate reserves once the transaction is done. In other words, you not only will need to document funds for your down payment and closing costs, you'll also need to show that you have enough cash left over to meet the reserve requirements once 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, to recap, if you're financing an investment with a traditional bank loan, make sure you have 6 months of PITI sitting in the bank, seasoned for at least two months, to meet the Fannie Mae reserve requirements. If you're rehabbing with the plan to refinance into a traditional bank loan later, make sure you account for the reserves ahead of time.
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 estimate property values? Check out my article about how to run comps so you know you're getting a good deal.
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