You know you need enough money to cover your down payment and closing costs when buying a home. But did you also know that most lenders want to see even more dollars stowed away in your checking or saving accounts before approving you for a mortgage?
It’s true: Lenders want to know that you have enough money saved to cover at least some of your future mortgage payments should you unexpectedly suffer a financial setback. This is why it’s so important to save diligently before deciding to apply for a mortgage. (See also: 4 Easy Ways to Start Saving for a Down Payment on a Home)
The need for additional cash reserves
If you are buying a single-family home, most lenders require that you have at least enough money saved to cover two monthly mortgage payments. This can vary, though: Some lenders might require that you save enough money to cover six months’ worth of mortgage payments, while others might not require that you have any reserves built up at all.
The reason why most require at least two months’ reserves is because lenders want to be certain that you can cover some of your mortgage payments should you lose your monthly income stream or see it drop significantly. This offers protection for the lender, making it less likely that you’ll default on your loan.
Lenders aren’t just worried about the money you’ll need to cover your principal mortgage balance and interest, either. Because most homeowners pay additional funds each month to cover their homeowners’ insurance and property taxes, lenders want to make sure that you’ve saved enough to cover these expenses, too.
This means if your monthly mortgage payment, including taxes and insurance, totals $2,500, you’ll want to have at least $5,000 stashed in savings.
Seasoning your savings
You do have to be careful with these savings. Lenders want to see that the dollars in your savings or checking account are “seasoned.” Basically, this means that the money has been in your account for at least two months before you apply for a mortgage.
When you apply for a home loan, the mortgage lender will ask for copies of your last two months’ worth of bank statements. This is to ensure that buying the home won’t be a financial burden for you, and that you are in good financial standing to pay your mortgage bill on time.
Don’t deposit a large sum of money into your savings account a week before you are ready to apply for a mortgage. If your lender sees that this money has recently appeared in your account, it will ask you to verify its source. Lenders want to see an established history of healthy savings habits. If a large amount of cash suddenly appears in your bank account — maybe a generous cash gift from a relative, for example — it doesn’t speak to your ability as a borrower to save responsibly.
If you received the money as a loan that you have to pay back, you might put your mortgage application in jeopardy. Lenders will count anything that you have to pay back, including a loan from a family member or friend, as debt. If you have too much debt, you might only qualify for a smaller mortgage — or you might not qualify for a mortgage at all.
Money saved for a down payment or closing costs doesn’t count
Maybe you were required to save a down payment of 5 percent of your home’s purchase price. If you are buying a home that costs $200,000, that comes out to $10,000. If you’ve saved $10,000 to cover this, your lender won’t allow you to count it as part of your savings reserve.
Closing costs are expensive, too. Say yours run $3,000. Unless you can convince the sellers to cover these costs, or get them rolled up into your mortgage loan, you’ll need to save these dollars separately, too. (See also: Here’s What’s Included in a Home’s Closing Costs)
It’s easy to forget when buying a home that mortgage lenders want to see additional savings beyond the typical down payment and closing costs. This is why it’s so important to work on building a large cash reserve before taking the plunge and applying for a mortgage.