How do "Reserves" work?

[Booner72]

Hi mortgage guru's.  We are trying for 110K FHA loan.  We are getting the money for closing and down payment from DH's 401K.  There will be enough left for reserves if needed.  I'm guessing a reserve requirement is by the UW, not FHA?  How much reserves?  Does that money just go into a savings account, or does Escrow get it, or what?  Do I have to prove that I had that money in savings for a while?

We just don't know WHEN to take the money outta the 401.  I believe my score is high enough now, but we still haven't gotten word that the seller's bank will accept our offer.  Then UW starts and who knows what they could find or decide that could be a deal breaker.  I'd sure hate to take that money out and not put it toward a house.  I believe you have to reinvest within 60 days to avoid the penalties (If we were to take it out and then not get the house, this is what we would do).

Thanks

[ShanetheMortgageMan]

FHA loans don't require reserves in most situations, although if your debt to income ratio is high, or credit isn't too great, they can help.

You can take the money out of your 401k at any time before closing, but figure it takes about a week or so to get the funds after they are requested, a day or two to clear your account, the underwriter needs to verify the paper trail, and your loan documents need to be drawn up and the signing needs to occur... so they should be requested no later than about 3 weeks before closing to make sure there is ample time to verify everything in time.

[stan_the_man]

@Shane -- I think OP may be really asking about how 401(k) money counts as reserves, not necessarily how long he needs to get the money to him.

@Booner72 -- Do you need the money from your 401(k) at settlement, or are you interested in having it counted as part of your reserves?

[Booner72]

Hi Stan & Shane -- I was asking both questions, really.  We need that $ for inspection and appraisal and earnest money.  As soon as I hear from the seller's bank they are going to pull my credit again.  If it's over 620 (hopefully 640), then we will take out the money.  But it is a short sale and we offered 105 plus 5% for closing costs.  Our realtor says BofA only pays the 3%, but it doesn't hurt to ask.  If bank comes back w/ anything below 110 then we will not counter-offer.  The original owners bought this place in 2007 for 286,000.  It's a screamin deal w/ property, 3 story chalet, fully fenced w/ cyclone, big shop.   The reason it's selling for this amt is because it's far off the main road - way out in the country.  (which is what we've always wanted anyway).

[ShanetheMortgageMan]

If the underwriter does require reserves for your loan, then 60% of the vested amount in your 401k can be used as long as the terms & conditions permit you to access the funds while you are employed (like for example a pension typically cannot be accessed until you retire, thus would not be able to be used as reserves until that point).  If you are using some of the funds in the 401k for down payment/closing costs/etc. then that part is deducted first, then 60% of the remaining amount qualifies as reserves.

So if you have $20k in a 401k.  $10k is being used for down payment/closing costs.  The remaining $10k vested portion would be considered $6,000 in reserves.

[Booner72]

Thanks, Shane. Hubby has 14K in his and he is "gifting" it to me since he's not on the loan.  My pension cannot be accessed (which I guess is good).

[ShanetheMortgageMan]

You are welcome.   Sometimes reserves can be gifted and sometimes they cannot - FHA permits it though.  FHA also doesn't require reserves on most loans.

[Booner72]

Hey Shane, do you think it could be gifted if we get a HOMEPATH if this house deal doesn't go through?

Thanks!

[ShanetheMortgageMan]

Yes reserves can be gifted with HomePath as well.  Fannie Mae loan programs permit that with a primary residence or second home you can use funds received as a personal gift to pay closing costs or as reserves. You must use your own funds to make the required minimum cash down payment, which Fannie Mae does not have any required cash investment from the borrower for a primary residence - it can all come from a gift.

[Booner72]

Sweet.  Thanks again.