Keep Your Eye on the Borrower’s Reserves!

Written By: Glenn Michaels, Op-Ed Writer

There are certain situations where the borrower must show that they have reserves after closing.

Individuals purchasing or refinancing three and/or four family homes with FHA financing must provide evidence that they will have three (3) months of PITI reserves. The reserve does not include funds received from a gift. The reserves must be the borrower’s own money. 

Very often when a borrower lacks the required reserves I ask if the borrower has a pension, Individual Retirement Account (IRA), a 401(K), a 403(B), United States Savings Bonds, or Stocks to get to the reserve requirements. Borrower’s very often do not realize the additional liquid assets they have.

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When utilizing automated underwriting make sure read the DU findings. FNMA has recently changed the reserve requirements for borrowers that financed additional properties above and beyond their primary residence. Below are the new formulas to make note of:

A.    If a borrower indicates that besides their primary residence that they own additional financed properties there are additional calculations required to be made. A borrower that owns one (1) to four (4) financed properties underwriters must add up the total of their unpaid principal balances. Then the total must be calculated at two (2) percent of the aggregate total. The calculated number is the required reserves after closing.
B.    If a borrower owns five (5) to six (6) financed properties. The aggregate unpaid principal balances must calculated at four (4) percent of the aggregate total becomes the reserves that must be shown.
C.    If a borrower owns seven (7) or more financed properties calculate the aggregate unpaid principal balance and then determine what six (6) percent of the aggregate total of the unpaid principal balances. 

Borrowers that own properties other than their owner occupied property now must be more liquid than before. Very often this should not be an issue since the borrower is receiving rental income and the rental income should be shown in the borrower’s bank statements.

On purchase transactions make sure the rental income on the contract of sale if shown and the rental income on the appraisal matches. Recently I had a file where the rental income and the appraisal’s rental income were different. The appraiser had to adjust the rental income on the appraisal report.

Some loan officers think the new FNMA calculation is now a “deal breaker”. It may not be since the borrower is collecting rent and hopefully being deposited into the bank account.


About The Author
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter ( As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. 

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