Why Three Months Worth Of Income Is Required When Buying A House

buying a house

Most aspiring homeowners know that you need to have some cash set aside if you’re buying a house. Along with a down payment, earnest money and home inspections mean you typically have to front some cash as the process moves forward. Plus, you might need to cover closing costs.  Especially, if you aren’t getting those covered by the seller. However, not all who attempt to walk the path toward homeownership are aware of the need for a cash reserve, too. It isn’t uncommon for banks to want two to three months’ worth of income available after the home buying process is over. If you’re wondering why that is. Here’s what you need to know about the cash reserve requirement.

What Is a Cash Reserve?

When it’s associated with the home buying process. A cash reserve is an amount of money that would be in savings after the purchase is complete. It represents the amount that would still be available in liquid assets after you cover the inspections. As well as down payment, closing costs, and any other expense that comes with getting a mortgage and buying a home that comes out of your pocket.

What qualifies as a liquid asset can vary from one lender to the next. However, this usually includes money in savings and checking accounts. As well as certain investments and select retirement accounts. If the value of an account could be turned into cold, hard cash quickly, it may count as a liquid asset.

How Big Your Cash Reserve Needs to Be

Each lender can dictate the required size of your cash reserve. As long as it follows the rules for your mortgage type. For a VA or USDA loan on a house that will be the buyer’s primary residence, there isn’t usually a cash reserve requirement. If you are getting an FHA loan, it’s generally at least three months of mortgage payments.

With a conventional mortgage, you might see a wider range of cash reserve minimums. Some lenders only require two to three months’ worth of mortgage payments to be available. Others make two to three months of income mandatory. At times, you might even need six or 12 months set aside.

It’s important to note that the kind of property you purchase can play a role. If you are buying a house that you’ll use as a primary residence, you might have a smaller cash reserve requirement than if you purchase a vacation home or investment property.

Additionally, your credit profile may also be a factor. Those with stellar credit might be able to have less in a cash reserve than those with good or fair credit. The loan-to-value ratio is also taken into consideration when a lender set the mandatory minimum, so those who make substantial down payments might encounter a less demanding cash reserve requirement.

Why Lenders Require Cash Reserves

Having a cash reserve after a home purchase benefits both the buyer and the lender. It ensures you have money available to handle the unexpected, decreasing the odds that a financial hardship will cause you to miss a mortgage payment.

Essentially, your cash reserve gives the lender peace of mind. When you secure a mortgage, the lender is taking a risk. With that money stashed away, the risk may seem less daunting as they will be fairly certain that you can keep up with your payments even if a financial emergency strikes.

Buying a House-Cash Reserve May Be Mandatory

While building your cash reserve might be challenging, it’s a necessity if your lender makes it mandatory. However, you might be able to explore other lenders or loan types to bring the amount down, though that isn’t always an option.

Ultimately, it’s wise to learn about cash reserve requirements in advance and work to get some money set aside. That way, you can be ready for whatever the lender requires, ensuring you can move forward when you find your ideal property.

Do you think having three months’ worth of income before you can buy a house is reasonable? Why or why not? Share your thoughts in the comments below.

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