What are Mortgage Reserves?

What are Mortgage Reserves?

If you have plenty of cash saved up for a down payment and closing costs, you might assume you’re ready to buy a home. Depending on your situation, however, you may need mortgage reserves as well. Mortgage reserves are assets, such as cash that you can draw from if your income changes and hinders your ability to pay your mortgage. Let’s take a closer look at what mortgage reserves are and when you might need them.

What is the Definition of Mortgage Reserves?

Also known as cash reserves or liquid financial reserves, mortgage reserves are savings you have set aside to pay your mortgage in the event you lose your job, sustain an injury, or face a loss in income. Essentially, they’re cash funds you can tap when you’re in a financial pinch and need to make your mortgage payments. While most lenders prefer reserves in the form of checking or savings accounts, these others sources may also be acceptable:

• Stock or bond investments 
• Mutual funds
• Money market funds
• Certificates  of deposit (CDs)
• 401(k)s, IRAs, and other retirement accounts
• Trust accounts
• Life insurance policies

Why Are They Required?

If you’re self-employed, buying an investment property or your application needs a boost because of poor credit or other factors, cash reserves may be required. They can give your lender reassurance that you’ll be able to make your loan payments if you experience financial hardship. Even if they aren’t required, however, it’s wise to have them on hand. These funds may provide you with some much needed peace of mind and reduce your risk of foreclosure during a financial setback.

How Much Do You Need?

Factors like your credit score, loan type, debt-to-income-ratio and loan-to-value ratio will determine the exact amount of cash reserves you may need. Generally speaking, however, lenders ask for at least a few months of housing payments in liquid assets. If you have a lower credit score, you may be asked to provide more reserves than someone with good or excellent credit. Here’s a look at how much you might need based on loan type:

• Conventional Loans: Loans backed by Fannie Mae and Freddie Mac typically require reserves ranging from zero to six months, depending on your particular situation.
• VA and USDA Loans: As long as you’re buying a single-family home to occupy, you won’t need any cash reserves with a VA or USDA loan.

In addition, if you’re an investor who is building your portfolio, lenders may require cash reserves based on a percentage of the loan balances tied to the number of rental properties you own, instead of a set number of monthly payments.

Bottom Line

While it may take some time to save up mortgage reserves, doing so will make it easier to qualify for a mortgage and cope with financial emergencies. For more information about mortgage reserves and how much you may need, don’t hesitate to fill out my convenient online form and get in touch.