Everything looks good on your application for a mortgage to purchase your single family residential investment property:
But then, in the process of reviewing your documentation and running their required public record reports, the underwriter discovers that you own other financed properties…
Conventional underwriting guidelines require borrowers to have a significant amount of reserves when you have multiple financed properties. For example, if you have two other $100,000 mortgages, you are required to show that you have $4,000 of additional reserves in the bank – representing 2% of the Unpaid Principal Balances (UPB) of these mortgages. This percentage increases to 4% of UPB if you have five or six financed properties, and 6% of UPB for up to ten financed properties.
Three reserve considerations when you have multiple properties (the last two requirements apply to the to-be-financed property, and only the last one requires that funds be escrowed):
1) 2-6% of Unpaid Principal Balances
2) 6 months PITI (Principal, Interest, Property Taxes and Insurance)
3) 3-4 months escrow cushion for property taxes and insurance.
It’s nice having our adult children home for the holidays. But if they are still living at home throughout the year, it may be because they have insufficient liquidity to afford a down payment for their own home.
If you need to help them out, you can either:
1. Gift them the down payment, or
2. Co-sign their loan
Under the first option, as long as your son/daughter can demonstrate they have had the funds in their bank account for two full monthly statement periods, your gift would be treated as if it were their own savings. And, the annual federal gift tax exclusion allows you to gift up to $14,000 in 2014 without it counting against your $5.34 million lifetime estate tax exemption.
If you elect to co-sign, then the down payment would come from you as a co-borrower (and so this would not be deemed a gift). But make sure the mortgage payments are made on time, because your credit will otherwise be adversely affected.
This is a crucial time of year if you or your children are in the market for a mortgage, particularly if self-employed. You will need to ensure that your 2014 tax return has sufficient income to support the required housing ratios. As an example, what you expense may make or break the ability for you to obtain the loan amount you need – because it is the “net after expense income” that counts when qualifying for a mortgage (not the gross income you generate).
Art Espinoza recently asked me to return to his radio show entitled “The Art of Investing”. Art is a respected financial advisor and wealth manager with offices in Vero Beach, Florida and Brookfield, Wisconsin, and his show airs every Saturday at 9:30 am on WAXE 107.9FM and 1370AM, or on iHeart Radio.