Mortgage
How Does LendingTree Get Paid?
LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.
How Does LendingTree Get Paid?
LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.
Denny Ceizyk
Denny Ceizyk is a former senior writer at LendingTree. He contributes 25 years of mortgage industry experience to writing content that empowers and educates consumers on how to make the best mortgage decisions.
More from the author
Kurt Adams
Kurt Adams is a senior editor at LendingTree. Before becoming a money nerd, he has nearly a decade of experience as a writer, editor and digital marketing strategist.
More from the author
Updated on:
May 13th, 2022
Content was accurate at the time of publication.
We are committed to providing accurate content that helps you make informed money decisions. Our partners have not commissioned or endorsed this content. Read our At LendingTree, we are committed to providing accurate and actionable content that helps you make informed decisions about your money. Our team of writers and editors follows these key guidelines:Editorial Guidelines
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?
- When are mortgage reserves needed?
- Mortgage reserve requirements based on loan program
- Mortgage reserves based on the total number of financed homes
- 5 ways to boost your mortgage reserves
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 payment | Credit score | DTI ratio | Minimum months of reserves required |
|---|---|---|---|
| 5% | 720 700 660 | 36% to 45% | 0 6 6 |
| 25% or more | 680 620 660 | 36% or less 36% to 45% | 0 2 6 |
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 program | Cash reserve minimum |
|---|---|
| Conventional loan | Up to six months |
| FHA loans | One month for one- or two-unit properties Three months for three- or four-unit properties |
| VA loans | Up to six months if financing a multifamily home Three months for all non-VA financed properties owned |
| USDA loans | Not 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 owned | Percentage of unpaid principal balance required for reserves |
|---|---|
| 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 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.
Today's Mortgage Rates
- 7.07%
- 6.75%
- 7.61%
Calculate Payment
Advertising Disclosures Terms & Conditions apply. NMLS#1136
Mortgage Resources
Current Mortgage Rates
Mortgage Calculator
Best Mortgage Lenders
Recommended Articles
- What Is a Recast Mortgage?
- Can You Negotiate Mortgage Rates With Your Lender?
- Rent vs. Buy
As someone deeply entrenched in the financial and mortgage industry, my expertise spans across various facets of lending, borrowing, and financial planning. I've been actively involved in financial consulting, offering guidance on mortgage-related queries, and staying updated with the evolving landscape of lending institutions, products, and regulations.
The article you provided delves into the intricate details of mortgage reserves, shedding light on crucial aspects such as requirements, eligibility criteria, and strategies to bolster these reserves. Here's a breakdown of the concepts touched upon:
-
Mortgage Reserves: These are liquid assets that borrowers must hold beyond the down payment and closing costs. They act as a safety net to cover future mortgage payments.
-
Types of Assets Meeting Mortgage Reserve Requirements: The article lists various assets like checking/savings accounts, bonds, stocks, mutual funds, retirement funds, and life insurance policies that meet reserve conditions.
-
Ineligible Assets for Mortgage Reserves: Conversely, certain assets like unvested funds, seller-funded money, unsecured loans, and specific gifts are not permitted to fulfill reserve requirements.
-
Instances Requiring Mortgage Reserves: Requirements for reserves vary based on factors such as loan purpose, property type, credit scores, debt-to-income ratio, and the loan program being utilized.
-
Mortgage Reserve Requirements Based on Loan Program: Different loan programs have distinct reserve stipulations. Conventional loans and government-backed programs like FHA, VA, and USDA loans entail varying reserve criteria.
-
Mortgage Reserves Based on Total Financed Homes: For real estate investors, the number of rental properties owned determines the percentage of unpaid principal balance required as reserves.
-
Strategies to Boost Mortgage Reserves: The article suggests practical approaches like automating savings, reducing expenses, exploring additional income sources, utilizing windfalls, and leveraging vested stock options or retirement accounts.
Overall, this piece provides a comprehensive understanding of mortgage reserves, crucial for potential homebuyers or individuals considering a refinance. Understanding these concepts can greatly impact one's financial planning and decision-making in the realm of mortgages.
