HUD Reserve Requirements

HUD Reserve Requirements And Guidelines On FHA Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

This ARTICLE On HUD Reserve Requirements And Guidelines On FHA Loans Was PUBLISHED On June 30th, 2020

What are the requirements for HUD reserves and guidelines for FHA loans

Although HUD Reserve Requirements require reserves in certain cases, homeowners should have reserves voluntarily.

  • Homeowners are responsible for their own repairs and maintenance, unlike renters
  • Renters can always contact their landlord in the event if something is not working
  • Certain repairs such as a breakdown on the HVAC systems, electric, plumbing can cost hundreds if not thousands of dollars
  • Appliances do break down
  • Appliance repair can cost a lot of money
  • In many instances, when an appliance breaks down, it is cheaper to replace them than trying to fix it
  • A refrigerator can run three to five thousand dollars
  • Many homeowners who live in the cold midwest may have a breakdown of their heating system during cold winters
  • Most contractors want payment when the service call has been completed
  • It is highly recommended homeowners have reserves for a rainy day
  • There are instances where lenders will require reserves
  • Reserves cannot be gifted
  • It needs to be the borrower’s own funds
  • You cannot use sellers concessions and/or lender credit for reserves

In this ARTICLE, we will discuss and cover HUD Reserve Requirements And Guidelines On FHA Loans.

HUD Reserve Requirements Versus Voluntarily Having Reserves

HUD Reserve Requirements Versus Voluntarily Having Reserves

Reserves are considered as compensating factors by lenders.

  • Maintenance is not covered by insurance
  • Homeowners are responsible for any breakdown and/or repairs to their homes
  • In general, HUD, the parent of FHA, does not require any reserves when buying a single-family home
  • However, there are instances where reserves are required
  • One month of reserves is required on all manual underwriting
  • Manual underwriting is when the automated underwriting system findings come back as refer/eligible versus approve/eligible

All refer/eligible per AUS needs to be manually underwritten. So what do one-month reserves mean?

What Are Reserves?

One month reserves mean the borrower needs to have one month of principal, interest, property taxes, insurance, and if applicable, homeowners association dues.

  • Reserves cannot be gifted
  • Sellers concessions and/or lender credit cannot be used for reserves
  • Reserves need to be the borrower’s own funds
  • Also, if you are purchasing a three to four-unit multi-family home, HUD requires borrowers to have three months of reserves
  • So in the case of manual underwriting and/or buying a three to four-unit multi-family property, the borrowers need to come up with the down payment, closing costs, and reserves
  • The down payment and closing costs can be gifted
  • Closing costs can be covered by sellers concessions
  • Sellers concessions cannot be used for the down payment and only for the closing costs
  • Not all loan programs have the same reserve requirements
  • Many lenders who have lender overlays may require additional reserves even though they may not be HUD guidelines

Gustan Cho Associates has no lender overlays on government and conventional loans.

See the chart below on the reserve requirements on other government loans and conventional mortgages:


There are instances where a mortgage underwriter can condition reserves on a borrower with less than perfect credit. There are other instances where an approve/eligible per AUS borrower can get downgraded to a manual underwrite. Therefore, one month’s reserves are required on manual underwrites.

What Can Be Used For Reserves

What Can Be Used For Reserves

Reserves need to be documented and be deemed sourced qualified funds. Reserve funds need to be liquid funds. It cannot be cash funds since it needs to be sourced and documented.

The following funds in the following accounts can be used as reserves:

  • Funds from a bank savings account
  • Funds from a bank checking account
  • Funds from a bank money market account
  • Stocks and bonds and/or other securities that can be liquidated
  • Mutual funds that can be liquidated
  • Certificates of Deposit from a bank (CD)
  • Accounts receivables from the Internal Revenue Service
  • 60% of the balance from your 401k, IRA, thrift savings plan or Keogh account
  • other investment accounts that belong to the borrower and are liquid can be used for reserves

Remember that reserves cannot be gifted or borrowed funds. Equity in other investment real estate owned by the borrower cannot be used for reserves. Proceeds from a cash-out refinance transaction cannot be used for reserves. Three months of reserves are required on three to four-unit manually underwritten properties as well.

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