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Are You Reserved?

Posted by:  Chip Poli
2013-03-15 08:01:17

Getting approved for a mortgage presents no small amount of paperwork. Tax returns are analyzed, credit scores are reviewed, pay check stubs and W2 forms are compared to information provided by the IRS. And that’s just getting started. But once you get your approval, your lender might just ask for a bit more money than you had planned on. There’s no need to give those funds to anyone, you just have to have them. They’re called reserves.

Reserves, called cash reserves by lenders, are an amount of funds available to the borrower after the loan has closed. Lenders will verify funds available to the borrower to make sure there’s enough money not only for the down payment but also for closing costs associated with the mortgage.

Lenders verify your available cash by reviewing copies of the bank or investment statements showing enough funds available. These funds must be yours, either from your own accounts or a financial gift from a qualified entity, and you must have immediate, unfettered access to them.

Historically, lenders required cash reserves on all loans. When a buyer closes on a home and there’s no more money in the bank, how will the new home owner pay the next mortgage? And let’s not forget that new buyers typically make trips to their local home improvement and furniture store right after buying a new home. Lenders required that borrowers have some money left in the bank after the closing dust settles.

Cash reserves are typically identified as a required number of months’ worth of PITI, or principal, interest, taxes and insurance in a qualified account. Common reserve requirements can be six or twelve months’ PITI. If your principal interest payment is $1,500, your monthly tax and homeowners’ insurance payments are $300, then your PITI is $1,800 each month. If your lender requires six months’ worth of PITI as cash reserves, you need to show that you have $10,800 in addition to the funds needed for a down payment and closing costs. Note, you don’t have to give anyone $10,800; you just have to prove you have it.

 Verifying Cash to Close

Not all loan programs require cash reserves and are typically waived entirely when the borrowers have a 20 percent down payment, excellent credit or both. And unlike funds verified for a down payment and closing costs, reserve funds can be non-liquid as well as liquid in nature. What’s a non-liquid account?

A liquid account is an account where you can access your funds immediately and without a penalty for withdrawal. Checking and savings accounts are common liquid accounts.

A non-liquid account is similar to a 401(k) or IRA account. The borrower may have access to the funds but only with a penalty applied. Still other non-liquid accounts restrict withdrawals altogether until the borrower reaches a certain age or other restriction.

When required, cash reserves can’t be ignored, they’ll be verified just like any other aspect of your loan application. So be prepared; don’t spend it, just show it.

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