Can I Spend My Savings Before Closing on a Mortgage?

Reader question: "We are scheduled to close on a home in about 45 days. We also have a vacation coming up, and we might have to dip into our savings to cover a portion of that expense. Is it okay to spend money from our savings account before closing on a mortgage loan? Is the lender done checking on bank balances and such?"

I would avoid spending any money out of your savings between now and the closing date, unless it's an emergency. And even then you should probably let you lender know what you're up to. Here are some things you need to consider before you tap into your savings account.

The Lender May Check Your Savings Balance Again

When you get approved for a mortgage loan, it's based on certain conditions that were met at the time of approval. These conditions include your credit score, the amount of money you have in savings, your current level of debt, and other factors related to your finances.

You knew that already. But here's the catch...

Many lenders today are checking these things again, closer to the actual closing date. They want to make sure nothing has changed significantly since the loan was first approved. If they find that you have less money in your savings account, it could present a problem.

Of course, it all comes down to the amount of money you're talking about. If you were to pull $500 from a savings account with $25,000 in it, the lender probably won't even raise an eyebrow. But if you reduce your savings account balance by a significant amount, you could run into trouble.

Remember, the lender wants to make sure you have enough money in reserve to cover your down payment and closing costs. They may also require you to have additional cash reserves for your first few mortgage payments. And that brings me to my next point.

Stricter Requirements For Cash Reserves

Depending on the type of mortgage loan and the lender you are using, you may be required to have additional cash reserves in the bank. This is money above and beyond your down payment and closing costs. The lender may require these funds to cover your first few payments. For example, they might tell you that you need three months' worth of mortgage payments in the bank. If your payment is estimated to be $2,000 month, you would need an additional $6,000 in your savings to meet the cash-reserve requirement.

Mortgage lenders today are stricter about cash reserves than they were in the past. During the housing boom, a lot of them didn't require any additional reserves all. Today I would say more than half of all lenders do require them. And a higher loan amount generally means additional requirements for cash reserves.

Of course, if you've already been approved for the loan, you should know what your lender's requirements are. The question is, will you still meet those requirements if you spend money from your savings account?

Closing Costs Can Be Higher Than Estimated

When you applied for the loan, you should have been given a document called the Good Faith Estimate or GFE. This document gives you an estimate of what your closing costs would be for the mortgage loan.

While the 2010 overhaul made these documents more accurate, you could still face surprises on closing day. In fact, it's not uncommon to see certain costs go up 10% from the estimated amount. This is another reason to protect your savings between now and the time you close on the loan.

A few days before your closing, you should receive another document called the HUD-1 settlement statement. This will tell you the exact amount you need to bring to closing, in the form of a cashier's check. But don't be surprised if the actual amount is more than what the lender told you on the GFE. This is another reason the think twice before spending money out of your savings before the closing.

When it comes to mortgage loans, it's better to have too much in savings than too little. A financing deal has never fallen through because the borrower had extra funds in the bank. It's just icing on the cake -- more money to cover your moving expenses, decorating, etc. But if you don't have enough to close, it can wreck the whole deal. I don't want to sugarcoat anything. It really is that serious.

Talk to Your Mortgage Broker or Lender First

Don't be afraid to ask your mortgage lender the same question you asked me. It's a lot better to ask about these things in advance than to hit them with surprises on closing day.

Based on the amount you need to spend from your savings, they might not have a problem with it at all. Or they might tell you you're barely meeting the cash-reserve requirement as it is, so you should leave your savings alone. They know their closing requirements better than you and I do. So don't hesitate to contact them. They want the deal to close just as much as you do. So they'll help you any way they can.

This article answers the question: Can I tap into my savings account before closing on the mortgage loan? Please note that every lending scenario is different. Only your lender can give you a straight answer on this question. At a minimum, you should consider each of the four points covered above.

If you would like to learn more about the mortgage process, you can use the search tool located at the top of this website. Good luck with your home buying process, and have fun on vacation!