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Why Mortgage Reserves Matter When Buying a Home

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If you’re buying or refinancing a home, you may need to budget for mortgage reserves, which are extra cash assets you can use to cover your monthly mortgage payments. Knowing how to meet cash reserve requirements (if they are required) will make for a smoother purchase or refinance loan experience.

What are mortgage reserves?

Mortgage reserves — also called cash reserves or “liquid financial reserves” by lenders — are assets that can be easily converted into cash. The most obvious cash asset is money in your checking or saving account.

Lenders typically consider an asset liquid if you can:

  • Withdraw funds from an account (like a bank or online checking account)
  • Sell an asset (like a car or stock fund)
  • Redeem funds vested in retirement or trust accounts
  • Borrow funds from a 401k or cash-value life insurance policy

Cash reserves requirements are based on a set number of months’ worth of monthly housing payments a borrower must have on hand after closing. The lenders use the entire monthly housing expense (including your principal, interest, property taxes and homeowners insurance (PITI)) and mortgage insurance you pay and homeowners association and condo fees. Mortgage reserves may be required on purchase loans or refinance loans.

What type of assets meet mortgage reserve requirements?

According to Fannie Mae Guidelines, the following asset accounts meet cash reserve conditions:

  • Checking or savings accounts
  • Funds in bonds, stocks, money market funds, mutual funds, certificates of deposit or trust accounts
  • Vested funds in a retirement fund
  • Cash value in a life insurance policy
  • A gift from a relative or friend (for conventional loans only)

Lenders will not allow you to use any of the following toward reserve requirements:

  • Unvested funds
  • Funds that require retirement, employment termination or death for withdrawal
  • Stock options or restricted stock that isn’t vested
  • Personal unsecured loans, like credit cards or signature loans
  • Money from the seller, real estate agents or any other party to a purchase
  • Gifts from a relative or friend (for VA or FHA loans)
  • Lender credits offered by your mortgage company
  • Money you’re receiving from a cash-out refinance

When are mortgage reserves needed?

The requirement for cash reserves varies depending on the purpose of your loan, the type of property you’re financing, your credit scores, debt-to-income (DTI) ratio and the loan program. In most cases, an automated underwriting system determines how many months’ worth of reserves you’ll need. Low credit scores (700 or lower), low down payments and a higher DTI ratio (above 36%) are usually a recipe for requiring greater mortgage reserves.

The table below shows how credit scores, DTI ratio and down payment may affect how much you’ll need for reserves on a conventional purchase or refinance mortgage for a single-family home:

Down paymentCredit scoreDTI ratio Minimum months of reserves required
36% to 45%0
25% or more680
36% or less
36% to 45%

Mortgage reserve requirements based on loan program

Government-backed loan program reserve requirements are different from conventional loan guidelines. You’ll be required to prove extra cash reserves if you’re buying a one- to-four unit property, even though you’ll be living in one of the units as your primary residence. If you’re taking out a loan backed by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA), the table below details how much you might need to budget for cash reserves.

Loan programCash reserve minimum
Conventional loanUp to six months
FHA loansOne month for one- or two-unit properties
Three months for three- or four-unit properties
VA loansUp to six months if financing a multifamily home
Three months for all non-VA financed properties owned
USDA loansNot required

Mortgage reserves based on the total number of financed homes

If you’re building a real estate investment portfolio, lenders require cash reserves based on a percentage of the loan balances secured by the number of rental properties you own, rather than a set number of monthly payments. The percentages are detailed below:

Number of properties ownedPercentage of unpaid principal balance required for reserves
One to four financed properties2%
Five to six financed properties4%
Seven to 10 financed properties6%

5 ways to boost your mortgage reserves

AUTOMATE YOUR SAVINGS SCHEDULE. Pick an amount of your earnings to directly deposit into your savings account on each payday — you could also set up automatic recurring deposits from your checking to your savings account through your bank or credit union.

REDUCE YOUR EXPENSES. Check your budget for ways to trim your spending. Cancel subscriptions for any items you no longer use (like monthly subscription services or a top-tier cable plan), and scale back on dining out and impulse shopping.

PICK UP A SIDE HUSTLE. If you earn more, you can save more. Consider starting a side hustle, such as freelance writing or tutoring, to supplement your current income and add to your savings.

REMEMBER YOUR WINDFALLS. Each time you get a bonus from your employer, an income tax refund or some other financial windfall, divert some or all of those funds to your savings account.

KEEP TRACK OF YOUR STOCK OPTION AND RETIREMENT ACCOUNTS. Restricted stock options may be used toward reserve requirements once they’re vested. Don’t forget to include your 401k balance on your loan application — it may help you cover required mortgage reserves if you can prove you’re allowed to borrow or withdraw funds from the account.

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