Savings Requirements for FHA Loans
FHA insured loans do require a savings requirement or what is referred to as “Reserves”. The total monthly reserve requirement is dictated by the borrower’s middle FICO score. A Reserve is the total amount of savings the borrower have in liquid assets after the down payment is used towards the purchase of the home. One month reserve equals one total monthly mortgage payment. If the borrower’s proposed monthly mortgage payment, the principal, interest, taxes and insurance (PITI) is $1,000, one month in reserve is $1,000 just the same. The general rule of 3 months of reserves is a good rule of thumb but not required in all cases. The three (3) months in reserve rule will only apply if the borrower is purchasing a 3 – 4 unit property or have a middle FICO score of less than 620.
FHA loan is the easiest loan to qualify for. With minimal down payment requirement of 3.5% and the down payment can be a gift from family members, it allows home buyers to realize their dream of home ownership.
Down payment can come from the borrower’s 401(k) account. If the home buyer borrows against their 401(k), it will not count as the borrower’s monthly payment obligations for underwriting purposes.
An FHA requirement regarding large non-payroll deposit is something that is quite often overlooked. Every borrower is required to provide a credible explanation and documentation of the source of funds where the large non-payroll deposit came from. Typically, when money is moved or transferred from one account to another, e.g. Savings to Checking, this is easily documented. However, there are circumstances wherein the borrower gets money from other people or another source. This is where the documentation is not evident.
In today’s world of lending, it is highly recommended that all borrowers be prepared for documentation. Have all sources of funds documented accordingly. Not only will this ensure that the loan file moves smoothly in Processing, this also eases the burden on behalf of the borrower, if everything is documented up front.
For additional information on savings or sourcing, please contact our FHA Home Loan Specialists at 281-860-2533.