Buying property number 3 cash reserves?

Question

Hi,

We own our primary home and a triplex. Our mortgage broker said in order for us to buy another property.... we would need 25% down. Plus 6 months cash reserve for our primary home and our triplex. Does this sound right? I'm reading all thses success stories with people owning lots of properties  I can't imagine having 6 months cash reserves per property. Please help me understand this

Thank you

Tony V

Shaun Weekes · Answer

Cash reserves have changed and your broker or loan officer isn't giving you accurate numbers.  Your primary residence doesn't require reserves and the subject will require 6 months if it's an investment home.  It will require 2 months if it's a 2nd home.  All other investment homes will require the percentages below.

1-4 homes = 2% of loan amounts for reserves

5-6 homes = 4% of loan amounts for reserves

7-10 homes=6% of loan amounts for reserves

Example from Fannie Mae Website:

Calculation of Reserves for Multiple Financed Properties

If the borrower owns other financed properties (determined in accordance with B2-2-03, Multiple Financed Properties for the Same Borrower), additional reserves must be calculated and documented for financed properties other       than the subject property and the borrower’s principal residence. The other financed       properties reserves amount must be determined by applying a specific percentage to       the aggregate of the outstanding unpaid principal balance (UPB) for mortgages and       HELOCs on these other financed properties. The percentages are based on the number       of financed properties:

• 2% of the aggregate UPB if the borrower has one to four financed properties,
• 4% of the aggregate UPB if the borrower has five to six financed properties, or
• 6% of the aggregate UPB if the borrower has seven to ten financed properties (DU only).

The aggregate UPB calculation does not include the mortgages and HELOCs that are on

• the subject property,
• the borrower’s principal residence,
• properties that are sold or pending sale, and
• accounts that will be paid by closing (or omitted in DU on the online loan application).

Note: DU will also include in the UPB calculation open mortgages and HELOCs on the credit             report that are not disclosed on the online loan application.

Simultaneous Second Home or Investment Property Transactions

If a lender is processing multiple second home or investment property applications       simultaneously, the same assets may be used to satisfy the reserve requirements for       both mortgage applications. Reserves are not cumulative for multiple applications.

Example: A lender is simultaneously processing two refinance applications for two       investment properties owned by the borrower. The application for property A requires       reserves of $5,000. The application for property B requires reserves of $10,000. Because       the reserves are covering the same properties, the lender does not have to verify       $15,000 in reserves, but only those required per each application.

Examples of Reserves Calculations

The following tables contain examples of reserves calculations for borrowers with       multiple financed properties.

Example 1: Three Financed Properties

Occupancy

Outstanding UPB

Monthly PITIA

Reserves Calculations

Subject: Second Home

$78,750

$776

2 Months PITIA =

$1,552

Principal

$0

$179

N/A

$0

Investor

$87,550

$787

$230,050 x 2% =

$4,601

Investor

$142,500

$905

$230,050

Total =

$6,153

Example 2: Six Financed Properties

Occupancy

Outstanding UPB

Monthly PITIA

Reserves Calculations

Subject: Investor

$78,750

$776

6 Months PITIA =

$4,656

Principal

$133,000

$946

N/A

$0

Investor

$87,550

$787

$345,030 x 4% =

$13,801

Investor

$142,500

$905

Investor

$84,950

$722

Investor

$30,030

$412

$345,030

Total =

$18,457

Example 3: Eight Financed Properties (DU ONLY)

Occupancy

Outstanding UPB

Monthly PITIA

Reserves Calculations

Subject: Investor

$78,750                                $776                                6 Months PITIA =                                $4,656

Principal                                $133,000                                $946                                N/A                                $0

Investor                                $87,550                                $787                               $629,530 x 6% =                                $37,772

Investor                                $142,500                                $905

Investor                                $84,950                                $722

Investor                                $30,030                                $412

Second Home                                $124,500                                $837

Investor                                $160,000                                $1,283

$629,530                                                                Total =

$42,427

Jerry Padilla · Answer

@Tony Velez

15% down is required for a SFR investment and 25% down for a MFR investment - up to 10 mortgaged properties are the most recent conventional guidelines for purchases. The reserves requirement you posted, is a previous guideline and may be an overlay for your current lender. You always need 6 months reserves on subject and here are the current required reserves:

Cash Reserves Required For Other Properties Owned by Investor;

If you have 1-4 financed properties than it is now 2% of all unpaid principle balances.

If you have 5-6 financed properties than it is now 4% of all unpaid principle balances.

If you have 7-10 financed properties than it is now 6% of all unpaid principle balances.

Money must be in account for 60 days or sourced. A HELOC can be used as down payment, but not as cash reserves.

Peter Tverdov · Answer

Yikes, if that is correct my reserve requirements went down a lot. I don't like that, think I'll stick to 6 months per property. Better to be a conservative investor than former investor.

Tony Velez · Answer

Awesome information. Thank you guys!

Buying property number 3 cash reserves?

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