The HomeReady™ loan provides borrowers with the ability to obtain a home loan if they have great credit, yet not enough income to qualify their debt ratio. People in this situation are usually left without a home loan, at least a conventional loan, because their debt ratio exceeds the 43% maximum allowed by the Qualified Mortgage guidelines. The good news is, however, that the HomeReady™ loan allows these borrowers to use the income of their household members, whether family or boarders, in order to qualify. As long as you are purchasing a home within a low-income or high minority census tract, you can use this program without any restrictions. The biggest question is, however, how much do the lenders require in reserves to use this program? Here, we talk about HomeReady™ Mortgage Reserve requirements.
HomeReady™ Reserve Requirements Defined
Even though the HomeReady™ program differs from any other loan program, there are some similar requirements, including the need for reserves. According to Fannie Mae, the following reserves are necessary:
- If your credit score is at least 680 and your LTV is greater than 75%, there are no reserve requirements
- If your credit score is at least 620 or above and your LTV is less than 75%, there are no reserve requirements
- If your credit score is at least 660 and your LTV is greater than 75%, you must have at least 6 months’ worth of reserves on hand
What it comes down to is the credit score and the LTV combination as this is how the risk level of your loan is determined. Borrowers with a lower credit score and higher debt ratio show the highest risk to lenders, which is why they require a specific amount of reserves.
What are Reserves?
Reserves are liquid assets that you hold that can be turned into cash right away. A few examples include cash on hand; money in a checking account; money in a savings account; or money in a liquid account, such as a money market. Basically, the money needs to be available immediately and must meet the following requirements:
- Immediate withdrawal from its account
- Immediate liquidity upon selling the asset
- Redemption of funds with immediate solvency
How can Reserves Help You?
So what if your credit score and LTV do not require you to have reserves on hand? Are there any benefits to having them? The answer is a resounding, “yes!” If you have any factors that make your loan profile risky, reserves can help to compensate for issues. Reserves help the lender see that you are not as risky as you seem because you have money on hand to pay for the mortgage payments should your income become unavailable. Typically, the more months’ worth of reserves you have on hand, the better off your chances of getting approved.
Reserves are meant to take the place of your income and serve as a backup should you become incapable of making enough money to make your mortgage payments. This means that even if you were to make no income temporarily, you would have the set amount of months of the mortgage payment covered. For example, if you have 6 months’ worth of reserves in your account, you would be able to cover your mortgage for six months. Of course, you would need to find replacement income during that time so that you could start making enough money to make the mortgage payment again, but this is the benefit of having reserves.
Generally, a borrower that is borderline between getting approved and not approved will be more likely to get approved if he has reserves on hand. If you look at two borrowers, each with identical credit scores of 660 and LTVs of 85%, but one borrower has 6 months’ worth of reserves on hand and one has no reserves on hand, the borrower with the reserves on hand is more likely to get the approval simply because of the lower risk he poses to the lender.
How do you Get Reserves?
The best way to start stacking up your accounts in order to have reserves is to start saving as much as you can, even if it is a little amount, as soon as you know you want to purchase a home. Even if you do not have six months’ worth of reserves, any amount can help you be more likely to get approved by the lender. Any factors that make your application look more enticing help you to get that much closer to owning a home.
Even though reserves technically are not a part of the approval process for the HomeReady™ loan, they never hurt. They can always help your case if you are trying to get approved for a loan and have borderline debt ratios, credit scores, or high LTVs. Remember that every lender has different requirements and different thresholds regarding what they can accept. The less risky you make your loan look, the better off your chances of getting approved will be.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.