Home Loan Information Home Loan Information From A Former Industry Insider

Finance Challenge: Reserves – the right amount, the right type, the right timing

So you have the down payment – sourced and seasoned just like it needs to be. All saved up, stored away nicely in the bank for the last 60 days, and ready to be invested into a home. The closing costs are there, too, and all perfectly documented for the last two months. Great job! Your down payment and closing costs are in order. This is something to be proud of!

It’s always something that needs to be covered right up front. When the loan officer is taking the application and they know what it requires for down payment and the approximate closing costs they also need to calculate in the specified amount of reserves. What are reserves? Straightforward it is enough to cover the principal, interest, taxes, and insurance (at a minimum).

Most loans require two months of reserves on the purchase of a primary residence and as much as six months (PITIA) on investment property purchases. But it’s not enough they be available they must also be sourced and seasoned just like the down payment and closing costs.

Here’s a little good news, though: reserves don’t have to be in cash form. In fact 100% of the following can be counted for reserves:

1. Stocks, bonds, mutual funds, U.S. government securities, and other securities that are traded on an exchange or marketplace general available to the public (such as NYSE, NASDAQ, Midwest SE, CBOT, or OTC) whose price can be readily verified through financial publications.
2. Cash-value life insurance (rather than face-value) that is verified. The borrower must be the owner of the policy and not the beneficiary.
3. Personal IRA and SEP-IRA accounts that are owned by the borrower and verified.
4. The borrower’s portion of undistributed trust funds.

Additionally a portion of the value of the following may be counted as reserves:

1. 401(k), KEOGH, 403(b) and other IRS-qualified employer plans may be counted as reserves; however, to account for withdrawal penalties and estimated taxes, 70% of the vested amount of the account should be used to determine the borrower’s available reserves. The borrower will be required to provide documentation that the funds are accessible for withdrawal. If the retirement account only allows for withdrawals in the event of the borrower’s employment termination, retirement, or death, these funds should not be considered as reserves.
2. Savings bonds may be counted at 100% of face value if mature. If the bonds are not mature, the amount counted towards reserves is based on the redeemable value at the time of underwriting.

Ask your Loan Officer about reserves. If you are an agent and want help understanding these please never hesitate to call me or have your client call me. I’m more than happy to help even if I do not have the ability to assist in your area.

Ken Cook – Nationwide Specialist – Information/Marketing – FHA Home Loans – 678-439-8683