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Asset and Reserve Requirements Explained

Asset and reserve requirements define the minimum liquid funds a mortgage borrower must have remaining in verified accounts after the down payment and closing costs are paid. Reserves are measured in months of the total housing payment (PITIA) and vary by loan program, property type, and number of financed properties owned by the borrower.

Key Takeaways

  • Reserves are measured in months of the total housing payment (PITIA) that must remain in the borrower's accounts after closing
  • Primary residence conventional loans with strong automated underwriting approval may require zero reserves, while investment properties typically require 6 months
  • Retirement account balances are generally counted at 60% of vested value for reserve purposes to account for taxes and penalties on early withdrawal
  • All large deposits within the most recent 60 days must be sourced and explained with documentation
  • Gift funds may count toward the down payment on primary residences but generally cannot be used to satisfy reserve requirements for investment properties
  • Borrowers with multiple financed properties face aggregate reserve requirements across all properties

How It Works

How Reserves Are Measured

Reserves are expressed as a number of months of the total monthly housing payment, which includes principal, interest, taxes, insurance, mortgage insurance, and homeowner’s association dues (PITIA). If the total monthly housing payment is $2,500 and the loan program requires two months of reserves, the borrower must have at least $5,000 in verified liquid assets remaining after the down payment and closing costs are deducted. The reserve requirement is calculated after all transaction costs are subtracted from the borrower’s total verified assets.

Reserve Requirements by Loan Program and Property Type

Reserve requirements vary significantly across loan programs and property types. For a primary residence conventional loan approved through automated underwriting, Fannie Mae may waive the reserve requirement entirely, particularly for borrowers with strong credit profiles and low LTV ratios. However, a conventional loan on a second home typically requires two months of reserves, and an investment property requires six months. FHA loans on a primary residence generally require one month of reserves for 1-2 unit properties and three months for 3-4 unit properties. VA loans typically do not require reserves for primary residence purchases but may require them for refinances or when the borrower has residual income concerns. USDA loans generally do not require reserves.

Acceptable Asset Types for Reserves

Lenders accept a range of asset types for reserves, but each type is treated differently. Checking and savings accounts are counted at 100% of the verified balance. Investment accounts (stocks, bonds, mutual funds) are typically counted at 100% of the current market value, though lenders may apply a discount for volatility. Retirement accounts such as 401(k) plans and IRAs are counted at 60% of the vested balance to account for taxes and early withdrawal penalties, unless the borrower is of retirement age and can access funds without penalty. Cash value of life insurance policies may be used, net of any outstanding policy loans. Trust fund proceeds are acceptable if the borrower has unrestricted access. Cryptocurrency, non-vested stock options, and unvested restricted stock units are generally not accepted as reserves.

Sourcing and Seasoning Requirements

Lenders require two months (60 days) of bank and asset account statements to verify reserves. Every deposit that is not a regular payroll deposit must be sourced and explained. A large deposit is generally defined as any single deposit exceeding 50% of the borrower’s total monthly qualifying income for conventional loans or any deposit exceeding $200 for FHA loans beyond regular payroll. Sourcing requires a paper trail showing where the funds originated, such as a sale of an asset (with bill of sale and proof of prior ownership), a tax refund (with IRS documentation), or a transfer from another verified account. Unsourced large deposits are excluded from available assets, which can cause the borrower to fall short of reserve requirements.

Gift Funds and Their Limitations

Gift funds from acceptable donors (typically family members) can be used toward the down payment and closing costs for primary residences under most loan programs. However, gift funds generally cannot be used to satisfy reserve requirements for investment properties and, under some programs, for second homes. The donor must provide a signed gift letter stating the funds are a gift with no expectation of repayment, along with documentation showing the donor’s ability to give the gift (such as the donor’s bank statement). For conventional loans with less than 20% down, the borrower typically must contribute at least 5% of the purchase price from their own funds if the property is a single-family primary residence, though this requirement does not apply when the LTV is 80% or less.

Related topics include mortgage lenders calculate income, variable income averaging (overtime, bonus, commission), rental income for mortgage qualification, debt-to-income ratio explained (dti), common income mistakes that cause mortgage denials, and mortgage pre-qualification vs pre-approval (income focus).

Key Factors

Factors relevant to Asset and Reserve Requirements Explained
Factor Description Typical Range
Property Type Primary residences require fewer reserves than second homes or investment properties 0-2 months primary / 2 months second home / 6 months investment
Number of Financed Properties Borrowers with multiple financed properties face escalating reserve requirements for each property 2 months each (1-4 properties) / 6 months each (5-10 properties)
Loan Program FHA, VA, USDA, and conventional programs each set different reserve thresholds VA/USDA often 0 months / FHA 1-3 months / Conventional 0-6 months
Reserve Months Required Number of months of PITIA that must remain in verified accounts after closing 0-6 months per property depending on above factors
Retirement Account Discount Retirement funds counted at reduced percentage to account for taxes and penalties on early withdrawal 60% of vested balance for borrowers under retirement age
Large Deposit Threshold Deposit size above which the lender requires sourcing documentation 50% of monthly qualifying income (conventional) / varies by program

Examples

Primary Residence Purchase with Minimal Reserve Requirement

Scenario: A borrower is purchasing a single-family primary residence with a conventional loan. The purchase price is $350,000 with 10% down ($35,000). Closing costs are estimated at $8,000. The borrower's verified checking and savings accounts total $52,000. Desktop Underwriter issues an Approve/Eligible finding with no reserve requirement.
Outcome: After deducting $35,000 for the down payment and $8,000 for closing costs, the borrower has $9,000 remaining. Since DU waived the reserve requirement, the $9,000 is not needed for qualification but provides the borrower with a financial cushion. If DU had required two months of reserves at a $2,200 PITIA ($4,400 needed), the borrower would still qualify with $9,000 remaining.

Investment Property Purchase with Six-Month Reserve Requirement

Scenario: A borrower is purchasing an investment property for $280,000 with 25% down ($70,000). Closing costs are $7,500. The PITIA on the new property is $1,600 per month. The borrower also owns two other financed investment properties with PITIA of $1,400 and $1,800 respectively. The borrower has $130,000 in a brokerage account and $45,000 in a 401(k) with a vested balance of $40,000.
Outcome: Required reserves: 6 months PITIA on the subject property ($9,600) plus 2 months each on the other two properties ($2,800 + $3,600 = $6,400), totaling $16,000 in reserves. Brokerage account after down payment and closing costs: $130,000 - $77,500 = $52,500 (counted at 100%). 401(k): $40,000 x 60% = $24,000. Total available reserves: $76,500. The borrower exceeds the $16,000 reserve requirement with significant margin.

Gift Funds Covering Down Payment on First-Time Purchase

Scenario: A first-time buyer is purchasing a $250,000 primary residence with 5% down ($12,500). The buyer has $6,000 in savings. Parents are gifting $12,000. Closing costs are $5,500 with a $2,500 seller credit, netting $3,000 due from the buyer.
Outcome: Total funds needed: $12,500 (down payment) + $3,000 (net closing costs) = $15,500. Available: $6,000 (own funds) + $12,000 (gift) = $18,000. Remaining after closing: $2,500. For a conventional loan with less than 20% down on a single-family primary residence, the borrower must contribute at least 5% from their own funds, which equals $12,500. With only $6,000 of their own funds, this borrower falls short of the minimum borrower contribution requirement and would need to either increase personal savings or consider FHA financing, which does not require a minimum borrower contribution when gift funds cover the remainder.

Common Mistakes to Avoid

  • Assuming all bank account balances count as available reserves

    Only the balance remaining after deducting the down payment, closing costs, and any prepaid items counts toward reserves. A borrower with $50,000 in the bank who needs $48,000 for down payment and closing costs has only $2,000 in reserves, which may be insufficient depending on the loan program and property type.

  • Making large cash deposits shortly before applying for a mortgage

    Cash deposits cannot be sourced because cash has no paper trail. A $5,000 cash deposit within the 60-day statement review period will likely be excluded from verified assets, reducing available reserves. Borrowers who routinely deposit cash income should transition to electronic deposits well in advance of applying for a mortgage.

  • Transferring funds between accounts during the application period without maintaining a paper trail

    Moving money between accounts creates the appearance of new deposits in the receiving account. Without corresponding statements from the source account showing the withdrawal, the lender cannot verify that the funds are the borrower's own money. All transfers must be documented with statements from both the sending and receiving accounts.

  • Counting retirement account balances at full value instead of the discounted rate

    Lenders apply a 60% discount to retirement account balances for borrowers who are not yet of retirement age. A borrower who counts on a $100,000 401(k) for reserves actually has $60,000 in qualifying reserves. Failing to apply this discount can result in a shortfall discovered during underwriting.

Documents You May Need

  • Two most recent monthly statements for all checking and savings accounts
  • Two most recent quarterly statements for all investment and brokerage accounts
  • Most recent statement for all retirement accounts (401(k), IRA, pension)
  • Gift letter signed by donor and borrower with required attestations
  • Donor's bank statement showing ability to provide gift and evidence of transfer
  • Documentation for large deposits: bill of sale, tax refund letter, or transfer source statements
  • Trust documents if using trust assets (showing borrower's access rights)
  • Cash value verification letter from life insurance company (if using life insurance cash value)

Frequently Asked Questions

Can I use a gift from a friend to cover my down payment?
Under conventional loan guidelines, gift donors are generally limited to family members, domestic partners, or a fiance/fiancee. FHA guidelines are broader and permit gifts from employers, charitable organizations, and government agencies in addition to family members. Gifts from interested parties to the transaction (such as the seller, real estate agent, or builder) are generally not permitted as they may be considered inducements to purchase. A signed gift letter and documentation of the donor's ability to give are always required.
Do I need reserves if I am buying a primary residence with an FHA loan?
For a 1-2 unit primary residence, FHA generally requires one month of PITIA in reserves. For 3-4 unit properties, the requirement increases to three months. However, when the borrower has additional financed properties, FHA may require reserves for those properties as well. The specific reserve requirement is confirmed through the automated underwriting system finding.
What is a seasoned deposit and how long must funds be in my account?
A seasoned deposit is one that has been in the borrower's account for at least 60 days (the standard statement review period). Deposits that fall within the 60-day window and are not regular payroll deposits must be sourced and explained. Once a deposit has aged beyond the 60-day statement review period, it is considered seasoned and does not require sourcing documentation. This is why financial advisors recommend having funds settled in accounts at least two to three months before applying for a mortgage.
Can I use stock options or RSUs as reserves?
Vested stock options that can be exercised and converted to cash may be accepted as reserves, typically at their current in-the-money value after estimated exercise costs and taxes. Unvested stock options and unvested restricted stock units (RSUs) are generally not accepted because the borrower cannot access these funds without meeting vesting conditions. The treatment varies by lender and may require a letter from the employer confirming the vesting schedule and current value.
What happens if my reserves are short by a small amount?
If reserves fall slightly below the requirement, the borrower has several options: deposit additional funds (which must be sourced), pay off a debt to reduce the PITIA and therefore reduce the reserve dollar amount, receive a gift (if the loan program allows gifts for reserves on the property type), or ask the lender to rerun automated underwriting with adjusted parameters. Even a shortfall of a few hundred dollars can result in an underwriting condition or denial, so reserves should be verified early in the process.
Are business account funds acceptable as personal reserves?
For sole proprietors, business account funds may be considered if the borrower can demonstrate that withdrawing the funds will not adversely affect the business. For borrowers with more than 50% ownership in a corporation, partnership, or LLC, business funds generally are not treated as personal reserves unless the business entity's financial statements and tax returns support the withdrawal. Lenders may require a CPA letter confirming that the withdrawal will not impair business operations. Co-mingling business and personal funds in the same account creates additional sourcing and documentation complications.
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