Looking at 2 potential investment properties and trying to evaluate some of the criteria a lender would use to underwrite me. As a starting point, i have a mortgage on my primary residence.
The first house i can easily cover down+closing and have no concerns. However the second house would only leave me with a very small amount of reserves, and would be my third mortgage. I’m not concerned with the financials on my end as the properties would cash flow well, I have access to a line of credit if an emergency arises, and my reserves will be replenished quickly enough.
My concern is how this would look to a lender. With good credit, should I expect this lack of liquidity after the final house to cause any issues? And if so, should I expect that to show in the form of a higher interest rate, or is there potential to not get approved? Also, do they factor in rental income with DTI calculations? If so that won't be a concern as it'd be under 20%, but if not I'd be around 35%. Will that cause any concern?
Thanks in advance!
@Patrick Menefee The lender look at the reserve because they want to see emergency funds are available. If you have reserve in form of 401k, IRA account or stock account they just care about reserve not more liquidity. According to guidelines you can go up to 50% DTI if you are staying lower that's good for your application but you will be approved at 50% DTI.
@Harjeet Bhatti this is great info, thank you. That's one of the things my lender told me the day after I posted...they look for 3 months of reserves on investment properties. He said 50% has to be liquid, the other 50% can come from 401k. Does this match what you understand? Or could that be a local thing?
Also, what are the implications of getting close to 50% DTI? Is there a specific point where it starts increasing your interest rate?
@Patrick Menefee No that's not right could be some kind of overlays. You can always question to the lender why you need liquid I can withdraw anytime from my account when I need it, most of the time you will have right answer if that's their overlays. 50% DTI is not effecting interest rate yes lender do see overall scenario but that's not a factor of higher interest rate.
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I've been told the same regarding liquity from a well-known bank. They said at close, they needed to see the funds in my business account. After close I could move them back.
The deal fell through for other reasons, but just wanted to comment as I was told the same thing.
@ CJ M. This is overlays of lender nothing can be done. You have to find other lender, guidelines from Fannie Mae
If the retirement assets are in the form of stocks, bonds, or mutual funds, the account must meet the requirements of B3-4.3-01, Stocks, Stock Options, Bonds, and Mutual Funds, for determining value and whether documentation of the borrower’s actual receipt of funds is required when used for the down payment and closing costs. When funds from retirement accounts are used for reserves, Fannie Mae does not require the funds to be withdrawn from the account(s).
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