Before I begin with the content of this post let me express my gratitude for those that serve in the reserves. Many have been or are to be called to active duty. Thank you for your service to our country.
Reserves as it pertains to a mortgage loan is quite simply how much money do you have left after you satisfy the down payment and closing cost. Reserves are generally measured by a number of months.
If you had to make your payments from your liquid assets how many months could you do this? Many conventional loans have reserve requirements varying by loan to value, occupancy type, debt to income, etc. Your home loan consultant should be addressing this issue with you. FHA does not have specific reserve requirements, but reserves often are viewed as a compensating factor to help strengthen other aspects of your loan application.
Many times, in working with my clients, I sense reluctance from them to share information regarding all of their accounts. This is particularly true when it comes to 401K's. IRA's/Keough's and the like. I believe this is due to the client does not intend to draw upon those funds for down payment and closing cost and therefore does not believe this information is important for me to know.
This brings me to another subject line, always give you loan officer the complete picture. Don't attempt to hide anything, good or bad. We are not the enemy. Having complete information helps us determine the best loan options available for you.
Other than sometimes being required why are reserves important? It helps answer what if questions. What if you lose your job? What if you experience unforeseen medical expenses? What if there is a death? What if there is a divorce? You get the picture. How many months can you hold things together until your life gets back on track?
These assets do have to be verified. Generally speaking, this is done by providing account statements that cover a two month period. For retirement assets only a percentage of the verified assets are considered for cash need for closing and reserves. Conventional lending takes into account 70% while FHA allows for only 60%.
When I reflect back over the last few years I recall far too many times loan approval was granted for borrowers with little or no reserves. I can also recall when the amount of reserves was so important that literally loan approval was determined over a difference of verified reserves of $50.00. The $50.00 made a difference in the number of months of reserves for the borrower.
Reserves are important not just for national security, but also for you economic security and many times for mortgage loan approval.
Jay Williams
252-493-4802
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