Home buyer: “I know my loan won’t close for another two weeks, but do you have any updates on why it hasn’t cleared yet? My family and I are all ready to move into our new home.”
Typical home lender: “Something has come up. I’m sorry to report this to you so late in the process, but I’m afraid you no longer qualify for the original rate that we locked.
Home buyer: “Why? What has changed?”
Typical home lender: Nothing has changed but unfortunately the loan program selected requires a minimum of six-months of reserves of mortgage payments. We will now have to switch to a program that allows for a smaller reserve requirement, and unfortunately it comes with a higher rate.
It is pertinent to understand reserves and how they impact your rate, even if you’ve already received a pre-approval because of scenarios just like this one. Rate changes due to reserve requirements occur far too often and are entirely avoidable. Planning for such “unexpected scenarios” is rather simple: expect and calculate for them. How? Let’s get started with what you absolutely must know.
Reserves are defined as the amount of cash that you will be required to have in your accounts, “reserved” after the closing of your loan. Many lenders require anywhere from three to twenty-four months of mortgage payments in a checking, savings or similar liquid account. Before you begin to sweat, know that every applicant faces different situations and a portion of your brokerage and retirement funds may also qualify.
If you do not meet the reserve requirement, you will not qualify for a lender’s top-tier program and therefore, may not receive the lowest rate of other pre-approvals that do not consider reserve requirements. Accurately calculating your post-closing reserves is one of the most important factors in determining the interest rate for your home loan. If the amount is not properly calculated upfront, you will have little certainty about your rate at closing.
Often what we see in the mortgage industry are lenders offering you great rates based on very little verified data, pushing you through their pipeline only to find out, deep in the process, that you don’t qualify for the original rate quote. In desperation, you are surprised with a higher rate or worse, get declined altogether. That is not only degrading to you but also unfair.
We believe in empowering home buyers to avoid situations which you can control. Instead of using pen and paper or asking you to use a fax machine, we bring our clients into the modern era of home loan approvals, using our innovative technology. Our interview-style application, account linking technology, and custom algorithms handle these calculations for you before you are quoted a rate and pre-approved for the loan.
This means, everything that typically happens after you receive a pre-approval with other companies, happens before you get the pre-approval with Neat Capital. By running diagnostics against your profile and cross-referencing this with all loan programs, you are presented with your optimal rate and program. We’ve essentially brought all the guessing out of the equation by having a "crystal clear" view of your entire financial profile upfront, at the point of application. Therefore, you no longer wait with a feeling of uncertainty; instead you secure your home with conviction.
Reserve calculations are particularly important for jumbo loans, defined as loan amounts that exceed $453,100 - $679,650 depending on the county in which you are buying. Jumbo loans are especially tricky for traditional lenders simply due to the sheer size of the loan. Most lenders will apply many additional rules for a jumbo loan program, such as larger reserve requirements, to ensure you can make these payments after closing. These requirements make it increasingly more complex for traditional lenders using archaic loan systems to qualify their applicants. Neat Capital’s application will tell you, automatically, what you qualify for because we’ve done the work to calculate your reserves in conjunction with all other variables. That’s what makes us special; we handle jumbo loans just as seamlessly as conventional loan sizes.
Calculating Your Reserves
- Plan-ahead, understand your lenders reserve requirements before they quote you a rate, issue you a pre-approval, and pull you into their process.
- Evaluate your options when determining the best lender for your unique needs
- Find a home loan lender that can provide certainty through a firm rate quote based upon accurately qualified data and first-class support every step of the way (read Zillow reviews of what it’s like to work with us).
- Shop for homes with confidence, knowing your rate won’t change
It is imperative to know the amount of reserves you will have after closing your loan. Due to the multitude of program types designed for different borrowing scenarios, it is critical to both understand your personal financial situation and match this properly in the beginning to avoid expensive surprises. We plan, expect, and automatically adjust for all these variables, ensuring a neat and seamless process. With full transparency of our process, closing related fees, and interest rate variables upfront, we create trusting relationships with our clients and give them greater autonomy to choose the optimal rate and program to fit their needs. That’s why we’re known as advocates in our field, we’re standing up so that home buyers can harness their own autonomy over the home loan process. To get started with this awesome experience and find out what you can afford, start you application today.
If you’re not quite ready to start an application, use our Home Affordability Calculator to obtain a high-level understanding of what price range you should be looking for based on your ability to meet reserve requirements. When considering your down payment, remember to consider how much you might need to set aside to indeed have enough funds to qualify for the loan.