Definition
Reserves
Mortgage reserves are the liquid or near-liquid assets a borrower still has after paying the down payment and closing costs, usually measured in months of the full housing payment. They show the lender a cushion against job loss or unexpected expenses, and larger reserves can strengthen an otherwise borderline file.
Lenders count reserves as months of PITI (plus mortgage insurance and HOA dues). Checking and savings accounts count in full. Stocks, bonds and mutual funds often count at their value or a discounted value. Retirement accounts may count at a reduced percentage, reflecting taxes and penalties on withdrawal, depending on the program. Gift funds, borrowed money and cash that cannot be documented generally do not qualify.
Worked example. A buyer's new housing payment is $2,500 a month. After the down payment and closing costs, they will have $10,000 in savings and $40,000 in a 401(k). If the program counts the savings in full and the retirement account at a reduced share, say 60% for illustration, total reserves are $34,000, or about 13.6 months. A program requiring six months is satisfied with room to spare.
Requirements vary. Many conventional primary-residence purchases need little or no reserves when automated underwriting approves, while jumbo loans, investment properties, second homes and multi-unit purchases commonly require several months, sometimes more for each additional financed property. Reserves are also a frequent compensating factor for higher ratios or lower credit scores.
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FAQ · 2 questions
Questions about Reserves
Do retirement accounts count as mortgage reserves?
Often yes, but usually at a reduced percentage of the balance to account for taxes and penalties on withdrawal. Each program sets its own rules.
How many months of reserves do I need?
It depends on the loan. Many standard purchases need few or none, while jumbo, investment and multi-unit loans commonly require several months of the housing payment.
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