Reserves
Reserves are liquid or near-liquid assets that a borrower retains after closing, measured in months of mortgage payments (PITI). Lenders require reserves as a financial cushion to demonstrate the borrower's ability to continue making payments if income is disrupted.
What This Means
How Reserves Are Measured
Reserves are calculated as the number of months of full mortgage payments (principal, interest, taxes, and insurance) that the borrower has in verified liquid assets after accounting for the down payment, closing costs, and any prepaid items. For example, if the monthly PITI payment is $2,000 and the borrower has $12,000 in eligible assets remaining after closing, the borrower has six months of reserves.
Reserve Requirements by Scenario
Reserve requirements vary based on property type, loan program, and risk factors:
- Primary residence, conventional - often reserves for strong credit profiles
- Second homes - typically reserves required
- Investment properties - generally or more
- Multiple financed properties - additional reserves for each property beyond the subject property, commonly per additional property
- FHA, VA, USDA - reserve requirements vary; FHA may require for certain scenarios
What Counts as Reserves
Acceptable reserve sources typically include:
- Checking and savings accounts
- Investment accounts (stocks, bonds, mutual funds), often counted at a discounted value (typically of market value)
- Retirement accounts (401k, IRA), usually counted at of the vested balance to account for taxes and penalties
- Cash value of life insurance policies
Gift funds generally cannot be used to satisfy reserve requirements. All reserve assets must be documented and sourced through bank or investment statements provided during the application process.