Do you know about the reserve requirement for people who are buying any home beyond your primary residence?
I am sure you know that the mortgage process is complicated and full of paperwork. Unfortunately, I have to tell you it only gets worse with the more houses you buy.
Not only do you have to qualify for the new house, you have to prove that you can still be responsible for the old houses. Some of the requirements are easy such as just providing a copy of all the leases (writing a kick booty lease) to your old houses in your portfolio. Unfortunately it doesn’t end there!
For your first loan you probably used the FHA, USDA, or VA loan. Those are amazing programs available to the first time home buyer. Unfortunately, except for the VA loan, they cap out at one loan.
As previously discussed, the conventional 5% loan is amazing. More often than not the 5% is still more money than you had to put down on your first loan. So now that you are looking to purchase a second (or third, etc.) house, you have to come up with even more money!
Enter Reserve Requirement
This only happens when you are buying more houses beyond the one you currently live in. So first, congratulations are in order. You were successful enough to want to do this again, or in my case again and again and again 🙂
The reserve requirement is “extra” funds that mortgage companies require you to have in place as an “oh shoot” fund to cover the mortgage.
You are required to have six months of the mortgage amount. So if your mortgage is $1,000, you need to have an extra $6,000 in extra cash. Unfortunately, most mortgages are higher than $1,000. For those of us who have a lot of mortgages this can mean before you know it this number is around five digits. Not only do you have to have a down payment, you also need this reserve amount. This can add up quickly.
This money does not need to be in readily accessible accounts. It only needs to be in a fund that has your name on it. Although we love investing in homes and that is our “primary” form of retirement saving, I am still an advocate of DIVERSIFICATION! The great thing is that your reserve funds can be kept in retirement accounts. We put $800 a month into my husband’s TSP retirement account. This is an amazing way to take care of the low fund costs, market up swings, AND have the money the bank requires for the next house purchase.
Start putting money in your reserve account before you need it. We recently raised our monthly deposit to $800 a month to make sure we have our reserve requirement when it’s needed!
What’s been your experience with the reserve requirement?0