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Reserve Requirement for a Mortgage

Reserve Requirement for a Mortgage

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

    Depending on your credit and financial profile, mortgage program, loan type and other factors, lenders may require that borrowers hold a minimum level of financial reserves at the time your mortgage closes.  Mortgage reserve requirements are designed to help borrowers better manage financial uncertainties after your loan closes.  While many borrowers are able to qualify for a mortgage without reserves, some borrowers are required to verify a specified level of financial reserves.

    For many borrowers, the reserve requirement presents a significant and unexpected financial challenge as they are required to come up with more funds in addition to paying their down payment and closing costs. For borrowers who are stretching to afford a home, the reserve requirement may cause them to delay the process or put buying a home out of reach. It is important that borrowers understand the reserve requirements for a mortgage upfront so that they can save sufficient funds to pay for all the costs associated with getting a mortgage and have enough money leftover in reserves.

    There are several points you should understand about reserve requirements in case your mortgage lender requires them.  First, reserve requirements are typically based on a certain number of months of total housing expense. For example, you may be required to hold three months of total monthly housing expense as funds in reserve at the time your mortgage closes. Total monthly housing expense includes your monthly mortgage payment, property tax, homeowners insurance and other applicable housing-related expenses such as mortgage insurance or homeowners association (HOA) fees. If your total monthly housing expense is $2,500 and your lender imposes a three month reserve requirement you would be required to hold at least $7,500 in funds when your mortgages closes ($2,500 * 3 months = $7,500). It is important to highlight that reserve requirements are usually based on total monthly housing expense and not just your monthly mortgage payment, which increases your financial burden.

    Another point to consider is that there are acceptable and unacceptable sources of reserves for a mortgage.  Lenders are focused on liquid assets so funds in checking, savings and brokerage accounts are acceptable sources of reserves.  Holdings in stocks, bonds, mutual funds, CDs, money market funds and trust accounts are also acceptable sources of reserve funds.  Additionally, the vested portion of a retirement account or life insurance policy can also be used for reserves although lenders typically only give borrowers partial credit for the value of their retirement accounts.        

    Unacceptable sources of funds for reserves include personal loans; unvested funds, stocks or stock options; equity in another property you own; private company stocks; and, money that you cannot access unless you retire, lose your job or pass away. Additionally, proceeds from a cash-out refinance cannot be used for mortgage reserves. Depending on the mortgage program and lender guidelines gifts may be an acceptable source of funds for reserves but borrowers should confirm with their lender how gifts are treated.

    Lenders are required to verify the sources of borrowers' reserve funds.  Borrowers are typically required to provide bank and brokerage account statements for the most recent two months as well as other relevant documents to verify their assets.  Because account values can fluctuate, lenders may use the two month average value of an account to calculate a borrower's liquid assets.   

    Additionally, the lender subtracts any funds designated for your down payment and closing costs to determine the value of your liquid funds after your mortgage closes. Any recent large deposits into your accounts may need to be seasoned, or in the account, for at least two months prior to your mortgage closing for the lender to consider that deposit in your asset calculation. Large deposits in your accounts within two months of your mortgage may be interpreted as a gift or a loan by the lender and may not be an acceptable source of reserve funds.

    While mortgage reserve requirements are an important consideration, please note that lenders have no control over how borrowers spend their money after your mortgage closes.  Although you are free to spend your money as you please, we recommend that borrowers maintain three to six months of total monthly housing expense as savings in reserve after your loan closes as sound financial planning.   

    The table below outlines the mortgage reserve requirements for many different mortgage programs and types of loan. Please note that reserve requirements vary according to many different factors including credit score, debt-to-income ratio, loan-to-value (LTV) ratio, loan program, loan type and property type.  In general, the mortgage reserve requirements, if applicable, are higher for borrowers with lower credit scores, higher debt-to-income ratios and higher LTV ratios.  The reserve requirements are also typically higher for investment properties and properties with more than one unit.  Borrowers should always check with lenders at the beginning of the loan process to determine how the mortgage reserve requirements apply to them.

  • Reserve Requirements by Mortgage Program and Loan Type
  • Conventional Mortgage
    • 1 Unit Property: 0 to 6 months of reserves are required depending on debt-to-income ratio, credit score, loan-to-value (LTV) ratio and mortgage program
    • No reserves are required with a minimum credit score of 700
    • No reserves are required with a minimum credit score of 640 and LTV ratio less than or equal to 75%
    • Two months of reserves are required with a debt-to-income ratio greater than 36%, credit score of at least 680 and LTV ratio greater than 75%
    • Six months of reserves are required with a credit score of 660 or lower and LTV ratio greater than 75%
    • 2 to 4 Unit Property: 6 to 12 months of reserves are required depending on debt-to-income ratio, credit score and loan-to-value (LTV) ratio
    Second Home / Vacation Home
    • 1 Unit Property: 2 to 12 months of reserves are required depending on debt-to-income ratio, credit score and loan-to-value (LTV) ratio
    • 2 months of reserves are required with a minimum credit score of 700 and LTV ratio greater than 75%
    • Twelve months of reserves are required with a debt-to-income ratio greater than 36%, credit score of 680 or lower and LTV ratio greater than 75%
    Investment Property
    • 1 Unit Property: 6 to 12 months of reserves are required depending on debt-to-income ratio, credit score and loan-to-value (LTV) ratio
    • Six months of reserves are required with a minimum credit score of 700 or with a credit score of 660 if the LTV ratio is less than or equal to 75%
    • Twelve months of reserves are required with a debt-to-income ratio greater than 36%, credit score of 680 or lower and LTV ratio greater than 75%
    • 2 to 4 Unit Property: 6 months of reserves are required if the credit score is greater than or equal to 680 and LTV ratio is greater than 75%
    • 12 months of reserves are required if the credit score is 660 or less and and LTV ratio is less than or equal to 75%
    Jumbo Mortgage
    • 3 to 6 months of reserves are typically required for a jumbo mortgage, depending on the lender and program
    Cash-Out Refinance (Primary Residence)
    • 1 Unit Property: 0 to 6 months of reserves are required depending on debt-to-income ratio, credit score, loan-to-value (LTV) ratio and mortgage program
    • 2 to 4 Unit Property: 6 months of reserves are required if the credit score is greater than or equal to 700 and 12 months of reserves are required if the credit score is 680 or less and debt-to-income ratio is greater than 36%
    FHA Mortgage
    • 1 to 2 Unit Properties: No reserves are required except for borrowers with challenging, non-traditional credit profiles or unique circumstances that require manual underwriting
    • For 1 to 2 unit properties, one month of reserves is required for borrowers that require manual underwriting
    • 3 to 4 Unit Properties: Three months of reserves are required
    VA Mortgage
    • 1 to 2 Unit Properties: No reserves are required
    • 3 to 4 Unit Properties: Six months of reserves are required
    • If you are buying a multi-family property and need rental income from the property to qualify for the loan, up to six months of reserves is typically required.  If you do not need the rental income to qualify for the mortgage, no reserves are required as long as the property is one or two units
    • Three months of reserves are required for each rental / investment property the borrower owns
    USDA Home Loan
    • No reserves are required but having at least two months of reserves can help the borrower qualify for the USDA Home Loan Program
    HUD Section 184 Home Loan
    • Single Unit Property: no reserves required
    • 2 to 4 Unit Property: six months of reserves are required
    Fannie Mae 97% LTV / 3% Down Mortgage
    • 1 Unit Property: 0 to 6 months of reserves are required depending on debt-to-income ratio, credit score, loan-to-value (LTV) ratio and mortgage program
    • No reserves are required with a minimum credit score of 700
    • No reserves are required with a minimum credit score of 640 and LTV ratio less than or equal to 75%
    • Two months of reserves are required with a debt-to-income ratio greater than 36%, credit score of at least 680 and LTV ratio greater than 75%
    • Six months of reserves are required with a credit score of 660 or lower and LTV ratio greater than 75%
    • 2 to 4 Unit Property: 6 to 12 months of reserves are required depending on debt-to-income ratio, credit score and loan-to-value (LTV) ratio
    Home Possible Mortgage
    • 1 Unit Property: No reserves are required
    • 2 to 4 Unit Properties: Two months of reserves although the requirement may be higher in some cases
    HomeReady Mortgage
    • 1 Unit Property: 0 to 6 months of reserves are required depending on debt-to-income ratio, credit score, loan-to-value (LTV) ratio and mortgage program
    • No reserves are required with a minimum credit score of 700
    • No reserves are required with a minimum credit score of 640 and LTV ratio less than or equal to 75%
    • Two months of reserves are required with a debt-to-income ratio greater than 36%, credit score of at least 680 and LTV ratio greater than 75%
    • Six months of reserves are required with a credit score of 660 or lower and LTV ratio greater than 75%
    • 2 to 4 Unit Property: 6 -to12 months of reserves are required depending on debt-to-income ratio, credit score and loan-to-value (LTV) ratio
    HomeStyle Renovation Mortgage
    • 1 Unit Property: 0 to 6 months of reserves are required depending on debt-to-income ratio, credit score, loan-to-value (LTV) ratio and mortgage program
    • No reserves are required with a minimum credit score of 700
    • No reserves are required with a minimum credit score of 640 and LTV ratio less than or equal to 75%
    • Two months of reserves are required with a debt-to-income ratio greater than 36%, credit score of at least 680 and LTV ratio greater than 75%
    • Six months of reserves are required with a credit score of 660 or lower and LTV ratio greater than 75%
    • 2 to 4 Unit Property: 6 to 12 months of reserves are required depending on debt-to-income ratio, credit score and loan-to-value (LTV) ratio
    • For two to four unit properties, borrowers are required to include a contingency reserve equal to 10% of the renovation project costs
    Bank of America Affordable Loan Solution
    • No reserves are required for most borrowers
    Chase DreaMaker Mortgage
    • No reserves required in most situations
    Citibank HomeRun Program
    • Two months of reserves are required
    NACA Mortgage Program
    • One to two months of reserves are required
    Wells Fargo yourFirst Mortgage
    • No reserves are required
    Your Path Mortgage Program
    • 1 Unit Property: No reserves are required
    • 2 to 4 Unit Properties: Two months of reserves are required
  • As outlined above, mortgage reserve requirements vary by lender and loan program.  We recommend that you contact multiple lenders in the table below to learn more about their reserve requirements and request loan terms.  Comparing multiple lenders and shopping for your mortgage is the best way to find the loan that is right for you.

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  • Sources

    Conventional Reserves: https://www.fanniemae.com/content/guide/selling/b3/4.1/01.html

    FHA Loan Reserves: https://www.hud.gov/sites/documents/40001HSGH.PDF#page=240

    VA Loan Reserves: https://www.benefits.va.gov/WARMS/docs/admin26/pamphlet/pam26_7/ch04.pdf

    USDA Home Loan Reserves: https://www.rd.usda.gov/files/IA_hp_rhsgianews-04-2017.pdf

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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