What are Reserves and do I need them?
Financial reserves are liquid assets that the borrower has after the mortgage closes. They are funds available to pay the mortgage/total housing expense in the event of income loss.
Funds to close are subtracted from available assets to determine funds left over for reserves. If your new housing payment is $3,500 and you have $7,000 in savings after closing, you have two months of reserves.
Acceptable Sources of Reserves:
• Checking or saving accounts
• Stocks, bonds, mutual funds, certificates of deposit, money market funds, trust accounts
• The amount vested in a retirement savings account (can use 60% of total)
• The cash value of a vested life insurance policy
Typically, a reserve requirement is most common when purchasing a second home, or an investment property. It may be two, six or even twelve months’ depending on the situation.
Having reserves will strengthen a loan file and are typically not required on conforming or government loans, for a first time buyer when approved by an automated underwriting system.
If a loan is referred by the automated system to an actual underwriter, requiring manual underwriting, the reserve requirement for a first time homebuyer is generally two months.