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.
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.
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