insurance payments, property taxes, landscaping fees, trash removal payments, etc. The $1800 mortgage also doesn’t factor in replacements and repairs of in-home property, like water boilers, laundry machines, electrical issues, etc. Suddenly, that $1800 mortgage payment has become a much, much bigger number. That’s called payment shock . If a lender thinks a buyer may face payment shock after moving into his/her new home, that doesn’t automatically hinder the loan going through. However, the underwriter is going to take this into consideration as best he/she can and will carefully check the buyer’s reserves, i.e., how much money they have in savings.
Income Reserves
When a buyer is living paycheck-to-paycheck due to lifestyle choices, it is going to be hard to get approved for a loan, even if they have a high income. Underwriters look at monthly expenses, not simply yearly projected income. Lenders like to see that buyers have money in savings (which is referred to as income reserves), ideally three to six months worth of expenses . If the borrower has little to no savings, he or she is a high- risk borrower and it is going to be more difficult to get the loan approved. It may not squelch the deal, but it can be an underwriting issue. Certainly, the underwriting team will scrutinize other parts of the loan more closely. For example, if the buyer has low income reserves, the lender will review what type of assets he/she has, the size of the down payment, and the source of their funds. The lender may find that the lack of savings is a negligible risk, or the lender may find that the borrower is barely scraping by, despite making a large salary. That’s a huge red flag that could easily kill a deal.
COMMON INCOME ISSUES
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