One question that often comes up with FHA loans is whether they require reserves.
This is the amount of money you have in savings after closing on your home, usually as a cushion in case of unexpected financial hardship.
The answer? Yes, FHA loans require reserves.
Understanding these reserve requirements can help you make informed decisions about your finances and better prepare for the home-buying process.
So, in this article, we’ll explore the reserve requirements so you are fully informed before applying for an FHA loan. Ready?
Let’s deep dive.
What Are FHA Loan Reserves?
FHA loan reserves are like a savings account that you need to have when you want to get a loan for buying a house.
The government wants to make sure that you have enough money saved up to pay for things like your monthly mortgage payments, property taxes, and insurance. So, they ask you to have some money saved up in case you need it later.
The amount of money you need to save depends on the loan amount you qualify for. Your lender will help you figure out how much money you need to save and make sure you have enough before they give you the loan.
How Many Months’ Reserves Are Needed for FHA Loan?
Most lenders typically require at least two months’ reserves for an FHA loan. This means you must have enough funds in your bank account to cover your mortgage payments for at least two months.
Sometimes, they may require more than two months’ worth of reserves. For instance, if you have a low credit rating, a high debt-to-income ratio, and/or a smaller down payment, your lender may require additional reserves to soften the risk of default.
Also, lenders may require that the reserves be verified via bank statements or other financial documents. Having adequate reserves helps you meet lender requirements and provides a safety net in case of unexpected financial setbacks.
It can also be helpful during the loan application process, as it shows lenders that you have financial stability and can make mortgage payments even if there is a temporary loss of income.
FHA Loan Reserve Requirements
The FHA loan reserve requirements are in addition to the standard FHA loan eligibility criteria you must qualify for. These usually depend on the type of house you intend to purchase and the loan amount involved.
They include:
- Cash-out refinancing: For cash-out refinancing, you must have reserves equal to three months’ worth of mortgage payments.
- Multifamily properties: For properties with five or more units, reserve requirements vary based on the number of units and the loan size. For instance, if you have a mortgage of one million dollars or less on a property with five or more units, you must have reserves equal to six months’ worth of mortgage payments.
- Single-family homes: You must have at least one month’s reserves for a one- to two-unit property. On the other hand, for a three- to four-unit property, you must have three months’ worth of reserves.
Note that the FHA 203k loan has a slightly different loan reserve requirement. Seek clarity on the difference between both loan options before going for it.
How Much Reserves is Needed for an FHA Loan?
The reserve amount required for an FHA loan depends on the lender and your circumstances.
Typically, lenders require at least two months of mortgage payments as reserves for FHA loans, but this can vary based on your credit rating, DTI ratio, and other factors.
Lenders may also require you to have additional cash reserves. The exact amount required varies based on the lender’s policies and your financial situation.
Some lenders may require three to six months’ worth of total housing expenses (including insurance, mortgage payments, and property taxes) in reserves, while others may require less.
If you’re looking to finance a new home in any of our service areas, then give us a call and we’ll help you decide how much reserve is appropriate for your situation.
Frequently Asked Questions
Can reserves be borrowed or gifted?
Yes, FHA loan reserves can be borrowed or gifted. Here is what you should know:
- Borrowed reserves: You can use borrowed funds to meet the reserve requirement for an FHA loan. However, you must qualify for the loan with the additional debt from the borrowed funds. Also, the borrowed funds must come from an acceptable source, such as a bank, credit union, or other financial institution. You must also provide evidence of the borrowed funds, such as a bank statement or loan contract.
- Gifted reserves: The FHA allows you to use gifted funds as reserves. The gift should be from an employer, family member, or other approved sources. You should have a gift letter from your donor stating that the funds are a gift and don’t need to be repaid. Also, the FHA requires proof of the transfer of funds into your account.
How can FHA loan reserve requirements affect your ability to qualify for an FHA loan?
Here are some ways in which FHA loan reserve requirements can affect your ability to qualify for an FHA loan:
- Higher interest rates: If you have a low reserve amount, you may be charged a higher interest rate on your FHA loan. When you have low reserves, lenders see you as a higher risk and may compensate for that by charging a higher interest rate.
- Loan approval: FHA loan reserve requirements can affect your ability to get approved for an FHA loan. If you don’t have enough reserves, your loan application may be denied, as you may be deemed as having a higher risk of defaulting on the loan.
- Lower loan amount: FHA loan reserve requirements can also affect the loan amount you may be approved for. If you have low reserves, you may be approved for a lower loan amount than they were hoping for.
How long do reserves need to be maintained for an FHA loan?
There are no specific rules regarding how long reserves must be maintained for an FHA loan. Still, lenders will generally look at your reserves as a sign of your financial stability and ability to settle mortgage payments.
Typically, lenders will require you to maintain reserves for at least a few months, but this can vary depending on the lender’s specific requirements.
For instance, some lenders may require you to reserve at least two months’ worth of mortgage payments, while others may require six months or more.
What options do you have if you can’t meet FHA loan reserve requirements?
If you can’t meet FHA loan reserve requirements, here are your options:
- Add a co-borrower: Adding a co-borrower to your loan application who has sufficient reserves can help you meet the reserve requirements for an FHA loan. However, keep in mind that the co-borrower will also be responsible for making payments on the loan.
- Alternative loan options: While FHA loans have several benefits, they are not the only loan option available. Conventional loans may have different or no reserve requirements, depending on the lender and the loan program.
- Lower your DTI ratio: A lower debt-to-income ratio can sometimes offset a lack of reserves. This can be achieved by paying off debt, increasing your income, or a combination of both.
- Negotiate with the lender: Some lenders may be willing to make exceptions to the reserve requirements if you have no compensating factors, such as a high credit rating or a low loan-to-value ratio.
- Raise your down payment: A larger down payment can offset the need for reserves. By putting more money down, you reduce the risk to the lender and may be able to qualify for the loan with fewer reserves.
Wrapping Up
While FHA loans do not technically require reserves, lenders may have their own reserve requirements that you must meet to qualify for an FHA loan.
These requirements typically insist on a 2-month reserve that can offset your loan payment in any emergency situation.
If any of this is lost on you, we can advise you on the FHA loan reserves you need to make your homeownership dream come true.
Just give us a all, and we’ll get right to it.
