Loan Reserves: The main purpose of reserves is purely loan risk mitigation: Do borrowers have the ability to pay for 3 or 6 months of Mortgage, Tax, and Insurance if they have no jobs tomorrow? Reserves are almost always required for investment properties simply because more investment properties go into foreclosures than if it were their primary home.
Reserves can be any liquidable assets: Sourceable Cash, 401Ks, IRAs, Stocks, Bonds, Mutual Funds, or even Life insurance Policy in some cases. Why Reserves help closing loans? In case borrowers are unable to make their schedule monthly payment, they can dip into their reserves to satisfy their mortgage obligation. This is all theoretical of course, but from the bank’s perspective, Reserves provides financial assurances for their investments. For Investment loan purchase, Reserves are mandatory.
Shoot us an email, if you have any questions, and we’ll be happy to clarify any further questions.
Escrow Accounts/ Impound Accounts: Escrow Accounts/ Impounds Accounts are saving accounts established by the bank to pay monthly Mortgage (Principal + Interest), Tax, and Insurance for borrowers. The most important thing to know about Escrow/ Impound account is: You don’t have to pay the yearly insurance and Property taxes. The Bank will pay these for you since they are included in the monthly payment. Thus, your monthly payment will be higher.
Property Tax and Insurance Premium readjusted yearly. As a result, borrower’s monthly mortgage statement changes from time to time. Adding to the confusion, the bank will often time do increase projection figures for the following year.
Consequently, even tax and insurance remain the same for the next year, borrower’s monthly payment will increase regardless. It is perfectly fine borrowers are looking to spread out their Property taxes into 12 monthly payments, but also expect monthly payment differences with mortgage Impound/ Escrow Account.
At Virchu Financial & Investment, we will provide you the best advice possible and prepare you—the borrowers, about the ins-n-outs of Impound/ Reserves account. For example, FHA and Conventional Loan less than 11% down payment, Escrow Account/ Impound Account is mandatory, as of 2018 and for the foreseeable future.