Reserve Funds for VA Loans
The VA loan is famous for its no down payment requirement. Having to put no money down along with reduced closing costs helps eligible VA borrowers get into homes sooner instead of waiting to save up for a down payment. Yet there are closing costs involved that must be addressed and accounted for. Most of the closing costs are one-time charges associated with the loan and others such as property taxes and insurance will occur throughout the life of the loan. There are also funds that are called “reserve” amounts that may be needed when closing on a VA home loan.
A reserve fund is an amount of cash identified as the borrower’s but not forfeited at the VA loan closing. Reserves are typically described as a specific number of house payments and include the principal and interest payment and monthly payments for taxes and insurance. VA loans do not require reserves for a single family home but do require six months of reserves if the property being bought and financed with a VA loan is a 3-4 unit property, called triplex or fourplex. If the new mortgage payment on a fourplex is $2,000 then the VA lender will need to verify the existence of six times $2,000 = $12,000. Note the $12,000 is not used, it just has to be verified.
If the veteran is buying a single family home yet owns other rental properties, the VA lender may require cash reserves to be verified for up to three months of mortgage payments for each rental property a veteran may own.
Escrow fund reserves are another form of reserves and requiring them is up to the individual VA lender. An escrow fund is established to take care of any property tax or insurance shortage that may occur when property taxes are paid and insurance premiums renew. If the insurance premium has increased or property taxes gone up from the previous year, the shortage is usually covered by an escrow reserve account set up at the closing table. VA lenders can ask for up to two months’ worth of escrow reserves in anticipation of future tax or insurance increases.