Did you have to save for reserves when applying for a mortgage loan? Why do you think lenders need it?
Reserves in a mortgage are your emergency funds to cover a period of payments. Many factors affect if a lender will ask for it and for how many months.
One is the loan program, which may need 0 to 6 months of mortgage reserves. The monthly payment for a $200,000 house is around $800 – $1,000, excluding taxes and insurance. So, depending on the other factors, that’s about $0 up to $6,000 worth of mortgage reserves.
$6,000 is a lot, especially if you need to pay for a down payment and closing costs. Both of these are essential in closing a mortgage. Down payment assistance (DPA) programs help pay part of your needs first. If you apply and qualify for these, you may have more budget for the closing costs and reserves!
The guide below may help you determine whether you need to save for reserves and for how many months. It also provides information about assistance programs. Who would have thought it’s possible to receive financial assistance to close a mortgage?
Have more budget for reserves when applying for a mortgage loan!
Express Takeaways
- Reserves are emergency funds to cover monthly mortgage payments.
- Different factors identify if you need to prepare for it for several months.
- A lender may need 0 to 6 months of reserves from acceptable sources.
- Saving tips help you set aside money for reserves quickly.
- Down payment assistance (DPA) programs are available to help pay part of what you need to close a mortgage.
- A borrower may enjoy loan approval and lower interest rates if they have reserves.
What are Mortgage Reserves?
Mortgage reserves are backup monthly payments if you lose your primary source of income. A mortgage lender may need this to approve your loan application.
Reserves are separate from the down payment and the closing costs. Unlike the two, reserves are available to the borrower even after the loan is closed.
How do Mortgage Reserves Work?
A lender determines if you need a reserve for monthly mortgage payments. This reserve comprises Principal, Interest, Tax, and Insurance (PITI).
Different factors affect the number of months required for reserves. If it is 1-6 months, you must present proof of funds to cover it.
But, often, a lender approves a loan application without needing reserves.
When do you Need Mortgage Reserves?
A lender may ask for mortgage reserves depending on the following factors:
- The transaction type.
- The property’s occupancy status and amortization type.
- The property’s number of units.
- The total number of a borrower’s financed properties.
- The borrower’s down payment, debt-to-income (DTI) ratio, and credit score.
A loan program may also ask you to provide mortgage reserves.
What are the Mortgage Reserve Requirements?
The reserve requirements vary by lender. To give you an idea, we will refer to the need for a Fannie Mae-backed loan. It is a government-sponsored enterprise that buys mortgages from many lenders.
| By loan program | |
| VA | -3 months for buyers planning to earn from an existing property they never occupied.
-6 months for buyers looking to buy a multi-unit property. |
| USDA | None |
| FHA | -None for 1 to 2-unit properties.
-3 for 3 to 4-unit properties. |
| Conventional | For Fannie Mae-backed loan
-2 months for three-financed properties. -6 months for six and eight-financed properties. |
| By transaction type | |
| Buy
Limited Cash Out Refinance |
0, 2, or 6 months |
| Cash Out Refinance | 0, 2, 6, or 12 months |
| By property type | |
| Principal house | 0 to 6 months |
| Second home | 2 months |
| 2-4 unit primary house
Investment property |
6 months |
| By credit score and the loan-to-value ratio | ||
| Credit Score | Loan-to-value ratio | Lowest Need for Reserves |
| 620 | ≤ 75% | 2 |
| 640 | ≤ 75% | 0-6 |
| 660 | > 75%
≤ 75% |
6
0 |
| 680 | > 75% | 0-6 |
|
By the number of financed properties |
|
| 3-4 | 2% of the unpaid principal balance |
| 5-6 | 4% of the unpaid principal balance |
| 7-10 | 6% of the unpaid principal balance |
If you are not applying for a loan secured by Fannie Mae, ask your lender about their reserves needs.
What are the Acceptable Sources of Mortgage Reserves?
Many lenders only accept reserves from the following acceptable sources:
- U.S. Treasury Bills, Notes, and Bonds.
- Obligations of Federal Government Agencies. Such as GNMA Mortgage-Backed Securities, Participation Bonds, and Farm Credit Administration issues.
- Demand and savings deposits at banks, savings and loan associations, and credit unions.
- Investment in money market accounts insured by one of the Federal agencies.
Your mortgage reserves may also come from borrowed funds.
What are the Acceptable Borrowed Funds?
If you apply for a Fannie Mae-backed or VA loan, you have another source of reserves. As they approve eligible funds from acceptable sources. For instance, a VA loan accepts a percentage of your retirement account. However, they do not accept reserves from gifts of equity, gift funds, and other forms.
What are the Unacceptable Sources of Reserves?
Fannie Mae will not accept mortgage reserves from the following sources:
- Unvested funds.
- Non-withdrawable funds due to other circumstances. The only acceptable reasons are the borrower’s retirement, employment termination, or death.
- Stock in an unlisted corporation.
- Non-vested stock options and restricted stock.
- Personal unsecured loans.
- Interested party contributions (IPCs).
- A lender’s contribution.
- Money from a cash-out refinance on the same property.
You should start saving for acceptable sources of mortgage reserves instead.
How to Save for Mortgage Reserves?
The following tips may help save for reserves.
- Adjust your budget
- Reduce the costs of your current house if it’s possible
- Automate your savings by setting it up with your bank
- Follow the Consumer Financial Protection Bureau’s Start Small, Save Up
- Use the Federal Trade Commission’s Make a Budget worksheet
The above tips may apply to saving for the down payment and closing costs. Mortgage lenders need both to close a loan.
How Much do Mortgage Lenders Need to Close a Mortgage?
The mortgage lenders need the following to close a loan.
- Down payment of up to 20%
- Closing costs of up to 6%
Financial assistance is available to help you pay a part of the total “cash to close”.
What is the Available Financial Assistance to Close a Mortgage?
Down payment assistance (DPA) programs help pay part of what you need to close a loan. Government-backed mortgages also allow homebuyers to pay as low as 3% if you qualify. If you want to learn more about these, visit Home Buyer Wallet. Let the website help you find the financial assistance you need to buy your home.
What are the Benefits of Mortgage Reserves?
Lenders only need some applicants to have mortgage reserves. But, if you present proof of them, you may enjoy the following:
- A higher chance of loan approval.
- Possibility of lower interest rate.
Mortgage reserves support your ability to handle the monthly payments. This assures the lender that you can pay for the first few months of the loan.
Mortgage reserves are a borrower’s emergency funds to cover 0-6 monthly payments. It is composed of principal, interest, tax, and insurance. Many factors affect the number of reserves you need from acceptable sources. Tips are available to help you start saving for reserves. Setting aside money for the down payment and closing costs is also important to close a mortgage. Down payment assistance (DPA) programs are available to help pay part of what you need to buy a home. Visit Home Buyer Wallet to find which financial aid may help you become a homeowner. So, don’t worry about saving that much for reserves! The DPA programs may help you have more budget if a lender needs it.
Article Sources
Homebuyer Wallet requires its writers to get information from original and reliable resources.
Find our standards in producing factual information and content in our editorial policy.
- U.S. Department of Housing and Urban Development, “CHAPTER 5. RESERVE FOR REPLACEMENTS, https://www.hud.gov/sites/documents/45662C5HSGH.PDF”
- Fannie Mae, “B3-4.1-01, Minimum Reserve Requirements, https://www.bankrate.com/real-estate/how-to-sell-your-house/”
- Fannie Mae, “Eligibility Matrix, https://singlefamily.fanniemae.com/media/20786/display”
- Consumer Financial Protection Bureau, “What is PITI?, https://www.consumerfinance.gov/ask-cfpb/what-is-piti-en-152/”
- Veterans United Home Loans, “Cash Reserves Requirements for VA Loans, https://www.veteransunited.com/futurehomeowners/va-buyers-cash-reserves/#:~:text=Many%20times%20they’ll%20also,rental%20property%20they%20never%20occupied.”
- U.S. Department of Agriculture, “Frequently Asked Questions p.26, https://www.rd.usda.gov/sites/default/files/rd-sfh-faqloanorigination.pdf”
- FHA Lenders, “FHA RESERVE REQUIREMENTS 2023, https://fhalenders.com/fha-reserve-requirements/”
- Fannie Mae, “What are the minimum reserve requirements?, https://www.bankrate.com/mortgages/cash-reserves-for-mortgage/
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