PITI and PITI Reserves
When a buyer applies for a mortgage, they will likely be asked about what their liquid assets are. The purpose of the question is to find out what has been put away to cover the down payment, closing costs, and monthly mortgage payments. Generally, it is a good idea for a buyer to make sure that they have plenty of assets in personal accounts and that those assets are seasoned for two months at least. PITI stands for principal, interest, taxes, and insurance. These are the parts that make up a total monthly mortgage payment and monthly escrow payments. If you are concerned about the steps that are needed prior to applying for a mortgage, including those related to PITI and PITI reserves, the experienced Boston real estate attorneys at Pulgini & Norton may be able to help.PITI and PITI Reserves
Traditional mortgage lenders verify that a borrower has a savings pattern, and their assets support the income that is stated. It is common for first-time homebuyers to believe that they can just put some assets from a family member's account into their own and have this go toward their ability to secure a mortgage. However, this is considered a false inflation for the sake of getting a lower mortgage rate. When money is not appropriately "seasoned," it will not be used by a traditional or institutional lender to determine a mortgage rate. Traditional lenders want to make sure that money has been in a borrower's account for several months before assets are accepted as being the borrower's.
PITI reserves are the cash that is left from a borrower's liquid assets after the borrower makes a down payment and pays the closing costs on a home. PITI reserves need to be equal to the amount that the borrower will pay in principal, interest, taxes, and insurance for a set period of time after the closing. For example, a lender might ask for six months of PITI reserves, such that if the PITI equal $2,000 for a month, the borrower needs to prove that they had liquid assets (seasoned) of at least $12,000.
Banks may use a multiple of this amount as the minimum that a borrower needs to show is their reserve when applying for a mortgage. A reserve is necessary for a bank because it shows that you can keep making your monthly payments for at least a certain period if you are terminated or laid off from your work, or if you are disabled or otherwise incapacitated and unable to work. From the lender's perspective, the idea is that adequate PITI reserves reduce the risk of default and make the borrower a less risky bet.
Buyers interested in securing a mortgage may ask a bank or mortgage broker how many months of reserves they need in order to qualify for a mortgage. When looking at rate sheets, buyers should be aware that asset requirements are defined in terms of PITI, and mortgage insurance will also be included in this amount when it is applicable. Each bank and institutional lender has its own reserve requirements. Generally, owner-occupied homes require 2-6 months of PITI in reserves, but the requirement may be higher. The two to six months allow you, as a borrower, to find a new job or other sources of income to avoid foreclosure. When it is a second home, however, the reserves may be 3-4 months or more. Investment properties tend to have higher reserve requirements.
Properties with 1-2 units do not have a reserve requirement for an FHA loan. For Fannie Mae and Freddie Mac loans, the requirements may depend on the type of property, the credit score, and the loan to value ratio. Reserve requirements vary more for jumbo loans and may even be several years’ worth of PITI.
As a buyer, you will want to move your money into a checking or savings account as soon as you start looking for property and obtain a verification of deposit that provides your average balance based on two months. Although retirement accounts may be used, lenders usually only consider 70% of them. When personal assets, such as jewelry, art, or cars, are used to qualify for a loan, you should save receipts so that you can prove where you got your funds.Contact a Real Estate Attorney in the Boston Area
At Pulgini & Norton, our experienced Boston lawyers can advise you on PITI and PITI reserves when you are buying a home. Our firm also handles real estate transactions in Andover, Quincy, and Braintree, among other Massachusetts cities. For a consultation with a home financing lawyer, contact us online or call us at 781-843-2200.