If you’re planning to secure traditional bank financing for investment property in the near future, whether you’re purchasing a new investment property or refinancing one you already own, it’s important that you don’t forget the reserves! They’re an essential part of your mortgage qualifications, and not having them lined up ahead of time can create some headaches for you as you try to secure your financing.
What Are Reserves and Why Are They Important?
Underwriting guidelines fall within three general categories called the “3 C’s”: credit, collateral, and capacity. Reserves fall within the capacity category and are particularly important for investment property transactions because having them demonstrates to the lender that you have the ability to cover your mortgage payments in the event your rental property business runs into financial trouble.
Fannie Mae guidelines stipulate that you have at least 6 months of PITI in reserve for investment property or owner-occupied transactions that involve a 2-4 unit property. In other words, you need to have 6 months worth of full mortgage payments, including taxes, insurance, HOA fees (if applicable), and mortgage insurance (if applicable) in the bank to qualify.
Additionally, you’ll need to document with bank statements that you’ve had the funds on hand for the last 60 days.
If you’re refinancing a property you’ve owned for a while, you probably have already built up a cash cushion for repairs and improvements, so documenting the funds should be pretty straightforward.
However, if you’re turning a newly acquired and rehabbed property into a rental, it’s important to account for reserves ahead of time in your game plan for the property. The last thing you need is to go through the process of buying the property, investing tens of thousands of dollars into it, and discovering near the finish line that you don’t have enough cash on hand to satisfy the reserve requirements for permanent bank financing. It’s important to plan for this ahead of time! Make sure when you run your numbers that you have enough seasoned cash on hand to keep the bank happy when it comes time to secure your permanent bank financing.
Again, to recap, if you’re refinancing an investment property, make sure you have 6 months of PITIA in the bank, seasoned for at least two months. If you’re rehabbing for rental, make sure you account for this in your game plan ahead of time. Reserves are an often overlooked part of investment property bank financing, so make sure you smooth the road for yourself by planning ahead.
Mark
Great article on how to acquire financing for a rental property.
There is a lot of information out there on how to get money to buy a primary residence but when it comes to getting good information on getting capital for rental properties its hard.
Do you think the current environment is favorable for people holding rental property loans to refinance?
It’s absolutely a great environment right now, especially if you can refinance a rental using the HARP program. The fees are limited, so it is probably one of the cheapest bank loans available for rentals. Thanks for stopping by!