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Valued Member
Posts: 44
Registered: ‎09-01-2009
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Retirement Account funds as reserves after closing

Hi, our convential mortgage application has been approved with conditions, one of which is "Document conditions under which retirement funds may be accessed". We are using our retirement funds as reserves after closing as we have used most of our cash for downpayment, closing, and to pay off debt leading up to this point to get our credit scores up. It looks like both my wife and my retirement funds can be accessed once employment with the employer ceases... it can be taken as a lump sum payout (with penalty) or rolled into an IRA/401(k), or it can remain where it is. So if one of us were to lose our job and couldn't make the mortgage payment, we woudl have access to the funds. I assume this is what the bank is looking for, some sort of statement to this affect from our HR or something?

Thanks!

Super Contributor
Posts: 8,360
Registered: ‎09-28-2007
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Re: Retirement Account funds as reserves after closing

[ Edited ]

That is correct, you would get the terms/conditions from the retirement account administrator or sometimes customer service can help you with them.  But if they are only accessible in connection with termination, retirement or death then they cannot be used towards reserves.  Your LO should have requested this information from the get go.  You should ask your loan officer if you can still qualify without counting the retirement assets.  How much would you have if they aren't counted?

Valued Member
Posts: 44
Registered: ‎09-01-2009
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Re: Retirement Account funds as reserves after closing

Oh, yikes, that isn't good. They just told me back in the beginning when I indicated we had retirement accounts that they would want to know if I am prevented from touching the funds until retirement, which is not the case. They didn't indicate I would need to have immediate access tomorrow if need be, which made sense to me b/c if one of us loses our job and thus our income stream is interrupted, we will have access then and that seemed like the important thing.

 

We will have about $5k cash left over after all is said and done which could be counted as reserves. But that isn't going to be enough because the payment, including PMI, insurance, etc., will be around $2650 and I also have a townhouse that we haven't sold yet so they want reserves to cover that payment as well which is $1200 (we have it rented out but don't have 25% equity quite yet so I'm under the impression we don't get to count it).

 

I'm very concerned now... everything else seems to be greased and ready to go and all the other conditions are easily satisfiable. Are there any other options? Can a family member gift to us what we need to meet the lender's reserve requirement? Any other ideas?

Super Contributor
Posts: 8,360
Registered: ‎09-28-2007
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Re: Retirement Account funds as reserves after closing

Reserves can't be gifted, but the down payment can.  With a conventional mortgage, if the total down payment is 20% or more, then any/all of the down payment can be gifted.  If the total down payment is less than 20%, then at least 5% must come from the borrowers (your) own funds, and the rest can be gifted.  How much is the total down payment?

 

The equity requirement on conventional is 30% to be able to count rental income from a vacated residence (25% equity requirement is for FHA loans), so yeah if you don't have 25% then you wouldn't have 30%, and you wouldn't be able to count the rental income from it in qualifying, and would need 6 months of that PITI payment in reserves in addition to the 2 months on the primary residence you are purchasing.

Valued Member
Posts: 44
Registered: ‎09-01-2009
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Re: Retirement Account funds as reserves after closing

Total down payment is 5% ($17,350), so that has to be my funds it sounds like. Can closing costs be gifted? Maybe i can get gift for that and then have more cash left over. Also, can intangible property that I have an appraisal for be considered reserves? (I'm thinking jewelry here). After closing, currently the expected cash I would have left over would be enough to cover the 2 months PITI on the primary residence, so I just need to cover the 6 months on the townhome which would be roughly $7000.

Frequent Contributor
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Registered: ‎06-07-2010
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Re: Retirement Account funds as reserves after closing


ShanetheMortgageMan wrote:

Reserves can't be gifted, but the down payment can.  With a conventional mortgage, if the total down payment is 20% or more, then any/all of the down payment can be gifted.  If the total down payment is less than 20%, then at least 5% must come from the borrowers (your) own funds, and the rest can be gifted.  How much is the total down payment?

 

The equity requirement on conventional is 30% to be able to count rental income from a vacated residence (25% equity requirement is for FHA loans), so yeah if you don't have 25% then you wouldn't have 30%, and you wouldn't be able to count the rental income from it in qualifying, and would need 6 months of that PITI payment in reserves in addition to the 2 months on the primary residence you are purchasing.


Srry to chime in shane but that rule seems to make alot of sense to me ... the more u still owe on the income property the more the rent should be allocated to pay the principle owed on that property.  It seems not to only protect the bank on betting on trying to split funds (the rent) with another lender, but its best to protect the borrower from getting thier heads underwater with obligations to both lenders (if they are not the same institution ... either way it makes sense).

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Senior Contributor
Posts: 3,299
Registered: ‎04-22-2008
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Re: Retirement Account funds as reserves after closing

That rule is also to prevent peopel from writing up a fake lease, claiming rental income on an underwater home, and buying a new home.  The proceeding to walk away on the old home.  ALot of people pulled that trick right at the beginning of the housing crisis and the banks tightened rules to make it very hard to qualify for a second home loan.

Valued Member
Posts: 44
Registered: ‎09-01-2009
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Re: Retirement Account funds as reserves after closing

Can an item like an expensive piece of jewlery/diamonds be considered for the purpose of reserve assets if you have the appropriate appraisal documentation? What about vehicles that are valued more than the loan on them or paid completely?

Senior Contributor
Posts: 3,299
Registered: ‎04-22-2008
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Re: Retirement Account funds as reserves after closing

I do not believe so.  Only cash and easily accesible investment/retirement accounts.  Items like cars and such usually take some time to sell and would be too much work for the bank to verify value (the insurance valuations on such things are never really accurate to what you could sell it for fast if needed).

Valued Member
Posts: 44
Registered: ‎09-01-2009
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Re: Retirement Account funds as reserves after closing

Ok thanks!

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