What are Mortgage Reserves?

What are reserves?

When buying a home, you need to have proof of income and savings for a down payment and closing costs. In some instances, the borrower also needs to provide proof of mortgage reserves. 

Mortgage reserves are savings that are available to the borrower after closing on a home. Reserves, or emergency funds, help to show the lender that the borrower is not a significant risk. 

When are reserves required by lenders?

Not all borrowers need reserves, especially for those who are buying a single-family home they plan to live in. Lenders may require proof of reserves if the borrower:

• has credit score lower than the requirement for the loan.
• has a high debt-to-income ratio.
• is buying a multi-unit or investment property.
• is buying a vacation home.

How much do I need to set aside?

Reserves are calculated in terms of monthly housing costs, including principal, interest, taxes, and insurance (PITI). Depending on the loan or program, you may need anywhere from one month to 12 months of reserves. More reserves are required for those who are self-employed or own multiple homes. 

Do reserves need to be cash savings?

Cash is not the only source of reserves. Liquid assets that can be converted to cash are acceptable ways to prove reserves. This includes stocks, bonds, mutual funds, the value of an insurance policy, and available retirement funds. Borrowed money and real estate equity do not meet the requirement for reserves. 

Do you have questions about mortgage reserves or the loan application process? Contact us today.