When can borrower cash reserves be used as a compensating factor for a manually underwritten loan?

Compensating factors may be used to justify approval of manually underwritten mortgages with qualifying ratios as described in Handbook 4000.1 II.A.5.d.viii.   Verified and documented cash Reserves may be cited as a compensating factor subject to the following requirements. 
• Reserves are equal to or exceed 3 total monthly Mortgage Payments (1 and 2 units); or 
• Reserves are equal to or exceed 6 total monthly Mortgage Payments (3 and 4 units).  

Reserves are calculated as the Borrower’s total assets less: 
• the total funds required to close the mortgage; 
• gifts; 
• borrowed funds; and 
• cash received at closing in a cash-out refinance transaction or incidental cash received at closing in the mortgage transaction.  

For additional information see Handbook 4000.1 II.A.5.d.viii; II.A.5.d.ix(B) available at  https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-04383