WHY TWO NEARLY IDENTICAL BORROWERS GOT 1/2% DIFFERENT RATES
We recently had two nearly identical borrowers get rate quotes that were 1/2% different on the same day they were quoted and here’s why:
I often blog about The 13 Factors That Influence A Borrower’s Mortgage Rate.
And the above two borrowers were nearly identical for all factors, including loan amount (around $800,000); credit score (800s); down payment (25%); property use (owner-occupied); property type (SFR); and type of loan (30-Year Fixed).
There was one huge difference though: reserves.
One borrower had ample “reserves” while the other had very little, making him ineligible for jumbo financing – and that is why his rate was 1/2 percent higher!
Because jumbo rates are again so much lower than conforming (Fannie/Freddie) rates and because reserves play such a huge role in whether or not a borrower qualifies for jumbo financing, I thought a brief blog in regard to reserves was warranted.
WHAT ARE RESERVES
Reserves are liquid funds remaining in a borrower’s account after close of escrow. Jumbo lenders require them because they want to make sure borrowers have enough funds to continue making their mortgage payments in the event of a job loss, medical emergency, or any event that might cause a loss of income.
Unfortunately, most jumbo lenders have different definitions of what constitutes liquid reserves – and this is what makes the reserves issue so confusing at times and it is one of the reasons it sometimes takes us so long to pre-approve jumbo borrowers.
Reserves can include checking and savings accounts, 401ks, IRAs, “liquid” investment portfolios, and the cash value of a vested life insurance policy.
A “liquid” investment portfolio is comprised of easily traded or marketable securities; stock in your uncle’s privately held corporation that nobody has ever heard of, despite your uncle’s insistence that it is worth $237 billion, will not count towards reserves.
In any case, figuring out how much reserves a borrower will have after close and what constitutes sufficient reserves for a particular lender is often very difficult.
For example, some lenders allow 60% of vested 401k assets to constitute reserves, while other lenders don’t allow any 401k assets.
In addition, some lenders will not allow investment portfolios to constitute reserves if there is a margin account attached to it, while others merely subtract the amount borrowed against the portfolio.
Note In Regard to Cryptocurrencies: Despite the enormous popularity of cryptocurrencies like Bitcoin, Dogecoin and Ethereum, none of our mainstream investors (including Fannie and Freddie) will currently accept cryptocurrencies as “reserves.” This is largely because of the volatility and confusion that still surrounds this relatively new asset class.
WHO REQUIRES WHAT?
FHA and Owner Occupied Conforming Loans typically do not require reserves, unless the borrower owns multiple properties or has high debt-to-income ratios.
The amount of reserves required for second home and investment purchases varies depending on the number of other properties the borrower owns. It ranges from 2-6 months on the subject property plus an additional percentage of the total outstanding balances of all unpaid mortgages on the borrower’s financed properties.
As mentioned above, most jumbo lenders require ample reserves.
Our best jumbo investors require as much as 12 months of housing payments for all financed homes to be held in reserves after close of escrow – and it is this requirement that prevents many strong borrowers from qualifying for our best jumbo interest rates.
JUMBO RATES FOR HIGH BALANCE CONFORMING BORROWERS
Qualifying for jumbo rates with ample reserves is more important than ever now because many jumbo lenders now offer jumbo financing to borrowers with loan amounts as low as $548,251.
This of course is always “jumbo” territory in Texas, but in CA and in other high-cost areas, $548,251 to $822,375 is considered “High Balance Conforming” territory.
We always offer our best jumbo rates to borrowers in the “High Balance” range, but ONLY if they qualify for all of the jumbo overlays.
More often than not, however, our High Balance borrowers do not qualify for our best jumbo financing and are thus better off with conforming financing that sometimes comes with 1/2% higher rates.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167