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Mortgage Approval! (Not So Fast)

Everything looks good on your application for a mortgage to purchase your single family residential investment property:

  • You are under contract at a below-market purchase price,
  • You have a signed lease with rent that far exceeds your projected property expenses,
  • You have sufficient liquidity to cover your down payment, closing costs and prepaid expenses,
  • Your credit score is excellent,
  • Your Debt-To-Income Ratio is below the standard 43% threshold (monthly combined housing and other debt obligations divided by monthly net income), and
  • You received an “Approved/Eligible Finding” on the required Fannie Mae report for the lender.

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.

Here’s the Point: If you have multiple financed properties, make sure you have sufficient liquidity to satisfy all of the conventional loan reserve requirements before obtaining a mortgage.
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