What are Reserves? - What are reserves? How much do I need?

Reserves are funds available to you that you could use to pay your mortgage payment if you should lose your job or run into some type of financial hardship.

The funds can be held in a checking or savings account, CD, money market account, mutual fund, stocks or a 401k. You will not have to access these funds, but you will have to prove that they exist.

The dollar amount that you need varies depending on the lender and loan program that you use. Many times reserves are not required at all. If they are required, the amount will usually be between one and six month's worth of the proposed mortgage payment, including taxes and insurance.

If you have a large amount of liquid reserves and a slightly less then perfect credit score your mortgage broker can run your loan through an automated underwriting system. If approved through the underwriting system will be eligible for conforming loan rates even with the lower credit scores.

It's just money that the lender/bank know you have to pay for the mortgage for x number of months. Typically this is 3-4 months worth. The poorer the credit the more reserves some lenders/banks need. Also, some lenders/bank will want the reserves to be season as well.

What are reserves? - When applying for a mortgage, reserves is a term that typically means an amount of money that is enough to cover your total monthly mortgage payment (Principal, Interest, Taxes and Insurance) for a specified period of time. For example: if your mortgage lender stated 6 months of reserves were required in order to obtain a mortgage and your total monthly mortgage payment was $1,000/month, then you would be required to have $6,000 put away somewhere, usually in the form of liquid assets.

In some cases during a cash out refinance, the amount of cash you receive at closing may be considered in calculating your total reserves.

Reserves in accounts such as 401K, IRA or other retirement funds are normally accepted at 70% of the value of the account. This is because if you drew money out of those accounts you would pay a penalty of roughly 20-30% and mortgage lenders take that into account when figuring your reserve account amount.

Examples of reserves include:
Savings account balance
CD
401k
Stocks
Bonds
Mutual funds

Lenders usually require reserves to lessen the risk of early payment defaults. Usually, 2 months reserves are required on most loan programs. The amount of reserves needed can vary depending on the type of loan program being applied for. For instance, a Full doc loan program usually requires less reserves than a Stated Income loan which can sometime be as high as 6 months of reserves.

Reserves and Assets - When applying for a mortgage, whether you fall into the conforming or sub-prime lending criteria, many lenders require that you at least state, and may even ask you to verify reserves and assets held in liquid accounts.

For certain types of loans, sometimes a certain amount of reserves are required. Reserves are liquid assets that you have in some type of account. They can be a in a 401k, IRA, Checking/Savings account, Mutual Funds, Money Market Account, stocks, bonds, etc... For example many lenders that offer 100% financing will require a borrower to have 2 months reserves in order to qualify for the loan. 1 month reserves is equal to your Principal, Interest, Taxes and Insurance Monthly Mortgage Payment.

The more risky the loan is for the lender the more reserves they may require. For example with most 100% financing programs for investment properties lenders require a minimum of 6 months worth of reserves and often as much as 12 months of reserves.

Often there is a "seasoning" requirement on these reserves. For example, if you need 2 months' reserves, and you go out and put the money in a bank that day, it may not be accepted by the lender. The funds must be "seasoned" in your account for at least a few months. There are also lenders who do not require the money to be seasoned. Check with your loan officer to find out all your options.

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