Question about conventional financing for third property

5 Replies

My short term goal is to buy a third property, type of property TBD. I have some questions about financing the deal.

I currently have two properties; A single family (primary) and a townhouse that generates rental income. Conventional financing seems to be the recommended approach to financing a property—especially if you have a 9-5 job. In my limited experience however, it’s my understanding I will need to be able to show that I have a certain amount of cash reserves set aside to maintain my current properties in order to get bank approval. Is this a correct assessment? 

to get a conventional loan on a property that you do not live in does require lists of cash reserves. Since you are useing a non-commercial loan, the banks genneraly don't care that you plan to rent it, they just want to know that you can pay for it even if you do not ever get a tenant. On my recently purchased property, I used my 401k that I can borrow from and the cash I had saved up for the rehab as reserves to show the bank. I also found a great local mortgage guy with a local underwriter. They worked with me much better than going to one of the big banks. Most bigger banks (Wells Fargo, Quicken, etc.), just told me no immediately.  It wasn't until I went to the smaller, local banks that I found someone who wanted to help.

Originally posted by @Scott Weaner :

My lender even looks at retirement accounts as a reserve.

Retirement accounts can be used as long as you can prove that they have some accessibility in the case of a need for early withdrawal. I am required to have my clients provide the "terms of withdrawal" for the retirement accounts we are using to satisfy the reserve requirement. There are very rare occasions that the participants in the plan have agreed to their funds being held in an account with absolutely no access unless they have reached retirement age or leave their place of employment. In those very rare cases we cannot use that specific account to fulfill the reserve requirement.

Most accounts have an accessibility with penalty and taxes associated with early withdrawal. Since that is the case most lenders who will accept this as a valid reserve account will only allow a percentage of the current value to be used . To account for potential market fluctuation as well as the above listed results of early withdrawal we use 60% as the factor with the investors we sell the end loans to.

@Mike Quealy  The more # of properties you have the more cash reserves you will be asked to have. As others have stated, you can use your retirement accounts to meet cash reserves. You would have to provide the specifics with regards to the terms of your retirement account.

Though you will not be allowed to have zero (or close to zero) reserves in cash and meet the entire requirement using retirement accounts.

Upen Patel

Federal NMLS# 1374243