VA Loans and Reserves
No, not that kind of reserves. Not the Armed Forces reserves but money in the bank. VA lenders evaluate the full VA home loan package regarding credit, income and assets and one of the items a VA lender might review is how much money is left in the bank after the loan has closed. Yes, you will need funds for closing costs and while VA loans may require fewer fees compared to other loans you will in fact need some amount of funds in the bank to be used either for these closing costs or to simply exist after the loan has officially closed.
Reserves are calculated as the number of months of PITI in the bank. PITI stands for Principal, Interest, Taxes and Insurance. If the PITI is $2,000 and the VA lender would like to see two month’s reserves in the bank that equals $4,000 in this example. Note that most VA loans don’t require reserves but when a lender is teetering on a loan approval, having additional reserves can help the underwriter feel more comfortable approving the VA loan request. Reserves are required however when buying and financing a four-unit property when the VA guidelines require six months of reserves verified in the bank.
Lenders also require reserves on a monthly basis, called residual income. Depending upon the location of the property and the number of people living in the property, VA loans require a specific amount of funds be left over each month after all bills are paid for. Your loan officer can tell you how much residual is required but a couple in the northeast needs to have $654 in leftover monthly income.
Finally, reserves are just a good idea. If you’ve saved and saved and bought your first home with your VA loan and there’s little money left in the till afterward, you might have wished you waited a little longer and saved up a bit more before closing.