Retirement Funds as Mortgage Reserves

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“Reserves” are a key piece of many Arizona home loan approvals.  Retirement assets may count as reserves however there are a few important rules to follow.  However, not knowing the rules can cause issues and even loan application denial.

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What are “RESERVES?”

In some cases, borrowers must have a certain amount of money left over after closing on their new home loan.  “Reserves” are the left over funds.  The amount of reserves required differs from transaction to transaction.

Are Retirement Funds Reserves?

The answer is yes.  Retirement funds often count as reserves.  Okay, the accurate answer is certain retirement funds count as reserves in some cases.  Whether or not retirement funds can count as reserves depends on 2 keys.

2 Keys to Counting Retirement Funds as Reserves

  1. Typically only 60% to 70% of vested balances can count
  2. Retirement funds may only count as reserves if the account allows withdraws or loans against the fund

Number 1 is easy.  For every $1,000 a lender can typically count $600 to $700 toward reserves.  Number 2 is more complex.  Follow me into the rabbit hole!

What is the purpose of Reserves?  Reserves ensure a borrower can cover costs related to the home being purchased and their additional homes owned. Furthermore, reserves must be accessible to the borrower if ever needed.  Makes sense right?  Funds the borrower cannot access should not count toward reserves.  After all,  the borrower does not really have easy quick access to those funds in a Real Estate related crisis.

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Accessibility of Retirement Funds

Retirement accounts come with a set of  rules that govern the accessibility of account funds.  These rules are in the “plan summary” or the “terms and conditions” for the account.  For example, a 401k often allows clients to withdraw funds for emergencies related to a primary residence.   On the other hand, typically emergency withdraws are not allowed for rental property transactions.  This means that the funds in a 401k or IRA with this type of “rule” could be counted toward the reserve requirement related to a primary residence. However, in this case retirement funds would NOT be counted as reserves on an investment property purchase.

Underwriters WILL Dissect Retirement Assets

An underwriter will NOT miss any detail when it comes to a borrowers retirement funds.  When determining if a borrower can use retirement assets as reserves underwriters turn over every stone.  When an Arizona mortgage loan officer only completes step 1 it winds up costing you in the end.  If a mortgage underwriter invented country dancing you would have never heard of the 2-step.  Cowboys and cowgirls everywhere would be dancing the 8-step!

By Jeremy House


  1. If you can take out a loan against it at anytime, will that count for reserves for an investment property?

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