Why Mortgage Reserves Matter When Buying a Home
If you’re applying for a home loan, you may need to set aside mortgage reserves, which are extra assets that allow you to cover your monthly mortgage payments. Reserves act as an emergency fund that you can use to pay your mortgage if you ever hit a financial speed bump, like being laid off or unable to work due to illness.
We’ll go over what counts as reserves and how much you need to meet the cash reserve requirements for common loan programs.
What are mortgage reserves?
Mortgage reserves — which lenders also refer to as cash reserves or liquid financial reserves — are assets that can be easily converted into cash. The most obvious cash asset is money in your checking or savings account.
Lenders typically consider an asset liquid if you can:
- Withdraw funds from an account (like a brick-and-mortar 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 401(k) or cash-value life insurance policy
How do mortgage reserves work?
Cash reserves requirements are typically expressed as a number of months’ worth of monthly housing payments. The borrower doesn’t have to give their cash reserves over to the lender when they purchase or refinance, just demonstrate that they’ll have the reserves on hand after closing.
To determine how much you need to set aside, lenders take into account your entire monthly housing expense, including your:
- Principal, interest, property taxes and homeowners insurance (PITI)
- Mortgage insurance
- Homeowners association or condo fees
Mortgage reserves are a specific type of cash reserves. Companies or individuals can set aside cash reserves, which are simply funds to cover a number of months of expected expenses. However, the phrase “cash reserves” is more often used to speak about the reserves of a business and “mortgage reserves” the reserves of an individual.
Cash reserves can also be used to cover unexpected expenses, so that a person or company doesn’t have to go into debt if something unforeseen comes up.
What counts for mortgage reserves?
| Acceptable assets | Unacceptable assets |
|---|---|
| Checking or savings accounts Funds in bonds, stocks, money market funds, mutual funds, certificates of deposit or trust accounts Vested funds in a 401(k) or other retirement fund Cash value in a life insurance policy A gift from a relative or friend (for conventional loans only) VA and FHA loans don’t allow gifts to be used for mortgage reserves. | Unvested funds Funds you can’t withdraw unless you retire, leave your job or die Unvested stock options or restricted stock Personal unsecured loans, like credit cards or signature loans Money from the home seller, real estate agents or any other party to a purchase Lender credits offered by your mortgage company Money you’re receiving from a cash-out refinance |
How much do I need for mortgage reserves?
Borrowers who have to meet mortgage reserve requirements typically need between two and six months’ worth of mortgage payments.
However, not everyone will have to set aside mortgage reserves. In fact, if you’re a conventional loan borrower buying a single-family home that you’ll live in, you likely won’t have to worry about mortgage reserve requirements.
Mortgage reserve requirements by loan type
| Loan program | Mortgage reserve minimum |
|---|---|
| Conventional loans |
|
| FHA loans |
|
| VA loans |
|
| USDA loans |
|
| Jumbo loans |
|
The exact dollar amount you’ll be required to pay depends on the type of property you’re financing, your credit scores, debt-to-income (DTI) ratio, loan-to-value (LTV) ratio and the loan program. Lower credit scores (below 700), a smaller down payment and a higher DTI ratio are usually a recipe for requiring greater mortgage reserves.
Mortgage reserves for those with multiple mortgages
If you have more than one mortgage, lenders calculate your required cash reserves as a percentage of all of your outstanding mortgage loan balances, rather than a set number of monthly payments. Lenders include second mortgages, like home equity loans and home equity lines of credit (HELOCs) in this calculation.
| Number of properties owned | Reserve requirement (as a percentage of the unpaid principal balance) |
|---|---|
| One to four financed properties | 2% |
| Five to six financed properties | 4% |
| Seven to 10 financed properties | 6% |
5 ways to boost your mortgage reserves
- Automate your savings Pick an amount of your earnings to deposit directly 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 you no longer use 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 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.
-
Find lost retirement accounts An additional 401(k) balance on your loan application can help you cover required mortgage reserves, as long as you can prove you’re allowed to borrow or withdraw funds from the account.
If you’ve lost track of old retirement accounts, here are three places you can go to search for lost retirement plans and funds:
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