Mortgages and reserves.

A visitor to the Mortgage Match website recently asked, "how much will I need in reserves for a zero down, interest only, 80/20 mortgage?". It's a good question, and it's surprising questions on this topic aren't asked more often.

First, let's explain what reserves are. A reserve fund is a certain amount of money that a mortgage borrower has in a verifiable bank account of some sort. From a lender's point-of-view, this reserve may work as a sort of back-up or emergency fund for a borrower, if for some reason, the borrower's income is interrrupted and temporarily stopped, as might be the case, if a borrower suffers a job "lay off".

The amount of money required in a reserve fund will vary from lender to lender; based on the specific lender's mortgage approval requirements. It can be equal to anywhere from two to six month's worth of mortgage PITI (principal, interest, taxes and insurance) payments.

Now, before this starts sounding a little "scary" to borrowers who don't have a lot of cash to work with... don't worry, there are some lenders who do NOT require any reserves at all. However, be aware if you're a borrower fitting this category, the number of lenders you may be able to obtain a mortgage from has narrowed considerably. Also, because a mortgage candidate without reserves may be considered a more risky borrower to work with... expect to pay a slightly higher interest rate on your new mortgage.

Getting back to the explanation of reserve requirements, as an example, if your new mortgage payment, consisting of principal, interest, taxes and hazard insurance premiums, adds up to $1,000 monthly, you may be required to have anywhere from $2,000 to $6,000 in a bank account which can be verified AFTER your closing costs are paid or deducted from your bank balance.

As a rule of thumb, how reserves and a borrower's cash position affect the overall success of a borrower getting approved for a mortgage can be summed up like this... the less money or cash that a borrower has, the fewer number of lenders will be available, and the higher the interest rate will be. The more cash a borrower has to work with, even on a zero down loan, the greater the number of mortgage options will be available, and the better the interest rate will be.

There's nothing wrong with being cash-strapped when your're a borrower; especially if your a first-time home buyer... the important thing is to simply get approved, and buy your home. At Mortgage Match, many, many borrowers have been helped even when they haven't been in a great cash position. The first step toward purchasing a home when you have limited cash resources is getting preapproved, and you can do that by clicking here.