Anticipated Savings
Lenders can initially decide if a borrower might be able to afford their closing costs based on the borrower’s expected savings. However, before the loan is finalized, the lender must check to make sure the borrower has actually saved this money.
When figuring out how much a borrower is expected to save before closing, the lender needs to be realistic. They start with the borrower’s income after taxes during the saving period. From this, they subtract the borrower’s current housing costs, monthly payments on debts that show on the credit report, and estimated everyday living expenses, such as money spent on food and getting around.
Let’s imagine a borrower, Alex, who plans to buy a home in six months. Alex’s take-home pay is $4,000 a month. Alex spends $1,000 a month on rent, $500 on car payments and credit cards (as seen on the credit report), and an estimated $1,500 on groceries, gas, and other day-to-day needs. The lender would calculate Alex’s potential savings by subtracting these expenses from the take-home pay, which suggests Alex could realistically save $1,000 a month, totaling $6,000 by the time of purchase.
Cash-on-Hand
Generally, borrowers cannot use cash they have at home (cash-on-hand) as proof of their ability to pay the down payment or closing costs when getting a mortgage. This rule helps ensure that all funds used in the transaction are traceable and legally obtained.
However, there is an exception for a specific type of loan called HomeReady mortgages. For these loans, cash-on-hand can be considered a valid source for covering the down payment and closing costs. HomeReady mortgages are designed to help buyers with lower and moderate incomes afford homes, so the rules are slightly different to make homeownership more accessible.
Imagine a borrower, Casey, who doesn’t have a traditional bank account but has been saving cash at home to buy a house. If Casey applies for a HomeReady mortgage, Casey might be able to use this cash-on-hand for the down payment and closing costs, which wouldn’t be allowed under most other loan types.
References
For more details, visit Anticipated Savings and Cash-on-Hand of the Fannie Mae Selling Guide.