- FHA has no minimum reserve requirement for most of its programs, as its objective is to help those who have difficulty acquiring conventional financing obtain a mortgage. Unlike with subprime and conventional loan terms with no government guarantee, the FHA doesn't increase interest rates or otherwise penalize borrowers who have no reserves. In recent years, lenders gave subprime borrowers -- those with less-than-ideal income, credit and assets -- risky loans that played a role in widespread defaults that preceded the mortgage crisis in 2007.
- Cash reserves are funds readily available to the borrower after the down payment and closing costs are paid. In theory, borrowers with reserves can access the funds from their personal accounts to pay mortgage and related housing costs for at least two to six months in case of illness, job loss or other financial hardship. Conventional lenders favor borrowers with reserves because it shows they are less likely to default and end up in foreclosure. FHA insurance compensates for a borrower's lack of reserves because the lender can recover their losses by filing a claim with the FHA insurance fund in the event of default.
- FHA's 203(b) insurance program for single-family homes is its most popular. It insures mortgages on one- to four-unit properties. Owners must live in at least one unit and may rent out the remainder. Because rental properties pose a higher risk for lenders -- due to vacancy rates and maintenance costs -- FHA requires borrowers on triplexes and fourplexes to maintain a certain amount of reserves. On purchase transactions involving three- and four-unit properties, borrowers must have personal reserves equivalent to three months' principal, interest, taxes and insurance (PITI) after closing, according to the FHA Handbook. Additionally, the reserves may not be derived from a gift -- the borrower must provide proof that the source of funds is his own savings, retirement or other account.
- Borrowers using projected income to qualify for an FHA-insured loan must have personal reserves. Projected income is salary scheduled to start within 60 days of loan closing, when the borrower has a guaranteed, non-revocable contract for employment. Teachers and doctors are among those who some may rely on projected income to qualify. In the absence of interim employment, "the lender must verify that the borrower will have sufficient ... cash reserves to support the mortgage payment and any other obligations between loan closing and the start of employment," according to the FHA Handbook.
- The lender may consider substantial cash reserves as a compensating factor for borrowers who exceed FHA's benchmark debt-to-income guidelines. The DTI expresses a borrower's housing and total monthly obligations as a percentage of his gross monthly income. FHA's maximum housing DTI is 31 percent and the total household payments DTI is 43 percent. Borrowers with high DTIs may still qualify for FHA-insured financing if they have at least three months' of housing payments in reserves.
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