Reserve Account for FHA

5 Replies

Sorry if this is the wrong forum section. I was just pre-approved for an FHA loan for my first house hack. I have been in school for the last four years and thought that my high student debt (100k+) and low income would prevent any form of conventional financing.

     My question is what kind of reserve is needed before the first buy? I'm looking to have 10k for closing and an extra 5k in a reserve account. I want to use a buyers agent to split the commission to have a little extra brought to the closing table. I'm trying to stay fairly conservative because when my student loans come out of deferment I wont have much extra beyond the rent for the unit I owner occupy. I'll probably end up getting a roommate for my unit to free up extra capital also.

Not sure what you mean about the buyers agent splitting commission meaning you'll have extra at closing? , but I think FHA will require 3 month's payments in reserves. You should check into Virginia's VHDA program for first-time homebuyers that can get you into a house with almost nothing down. It combines the FHA loan with a special loan to cover the FHA down payment as well and requires taking a homeowner class.

I'm not sure what is required, but normally I'd say $5K is enough to deal with things that come up, especially if you are willing to be scrappy, do some work yourself, and/or have time to shop for cheaper options.  But if funds are really tight, you probably want to have $7500 or $10K.  A roomate is probably a great idea to get off to a solid start.

In the book "Investing in Duplexes, Triplexes, and Quads" Larry Loftis talks about how he negotiates a 50/50 split of the buyers agent's commission to bring extra funds to the closing table. Is this not a common practice? I'm not buying quite yet but was planning on using this strategy on the deal.

Good luck on getting an agent to lower commissions. Usually as a seller you will have more leverage in negotiating a lower commission but as a buyer not so much.
Another good source for help with closing cost is Fannie Mae homepath. Definitely google homepath and check that out.

Good luck!

I'd find a lender that knows how to work investment deals, especially house hack style deals. They will likely know the underwriting requirements in your area like how much you'll need in reserves. My loans have typically required ~3 months PITI (the full mortgage payment.) You'll want to have reserves anyway, putting every dime you have into a deal is way too much exposure - you're just one emergency from broke in that scenario.

Regarding the commission split with your agent:

It's not unheard of in my market for agents to give a "brother in law" rate to an investor or friend that will be doing more deals down the line - this can come in the form of kicking back some of the commission at closing to the buyer. If you're just using your agent to write the offer, there will likely be many that might be willing to do this to establish a longer term relationship. I'd avoid making them drive you around too much, calling them for research, and then hoping they'll give you the first crack at a great deal when they see one - all knowing they only make half the commission working for you. You will certainly not get a chance at pocket listings or their other off market opportunities if your unique selling proposition is paying them less for their work. Now, will the commission split work for MLS deals you find yourself? Absolutely.

Lastly, I'd be weary of counting on the commission split to make the deal work. If your deal is tight enough that you need to have one hand in your vendors' pocket for it to go through, you might not want that deal. You want the type of deals that will encourage you to give your vendors a raise! The ideal lender / agent / accountant to have on your team is the type that can get you access to deals nobody else sees. 

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