You pay more the list price or the agreed-upon price for a home. Yes, you pay the seller the amount you agreed to pay, but you also pay the lender and any other third parties involved in the transaction. But it doesn’t stop there. Some lenders/loan programs require mortgage reserves or money on hand to cover your mortgage payments or any house emergencies that may occur.
Owning a house is expensive and lenders want to make sure you’ll be okay. If they max out your savings and let you borrow as much as your income allows, you may run into trouble getting your mortgage paid one day. That’s where mortgage reserves come in handy.
What are Mortgage Reserves?
Mortgage reserves are funds that will remain left over in your account after you close on the loan. After you pay off the seller, lender, appraiser, attorney, and title company, it’s the money that sits in your account.
If you lose your job, fall ill, or have any other type of emergency, your mortgage reserves can help you make your mortgage payments on time. Borrowers typically have mortgage reserves in:
- Savings accounts
- Checking accounts
- Life insurance with cash value
How Long Does Money Need to be in Your Account?
Lenders don’t count funds that aren’t seasoned. For a mortgage, seasoned means in your account for at least 60 days. If you notice, lenders always ask for the last two months’ of bank statements. They are looking for any large deposits within that time. That’s why they say your funds should be seasoned for 60 days or two months.
If you do have large deposits within 60 days, be ready to provide proof of their origination. For example, if you sold your car recently and received a large payment for it, show the lender the bill of sale and canceled check or proof of wire transfer.
If you can’t prove the funds’ origination, you won’t be able to use them as mortgage reserves. It’s worth waiting the two months that lenders require in order for your funds to count.
Do you Need Reserves?
Not all loan programs require reserves. In fact, most loans for primary residences don’t require them. This includes conventional, FHA, VA, and USDA loans. Most loan programs start requiring reserves when you need a loan for something out of the ordinary.
Conventional loans, for example, require reserves when you want a loan for a second home or investment home. If you start adding units, such as a 2-4 unit property, the reserve requirement increases. A second home that is a single-family residence, for example, needs two months of reserves, whereas a multi-unit investment unit needs 6 – 12 months of reserves.
FHA loans typically don’t require reserves unless you buy a multi-unit property with more than two units. VA and USDA loans don’t require reserves at all, but will consider them if it helps your application.
In all cases, lenders view reserves as a compensating factor. In other words, it can make up for other ‘risky’ factors, such as a borderline credit score or high debt ratio. It’s never a bad thing to have money on hand. It makes you look less risky and more likely to be able to afford the loan even if you lose your job.
Reserves Must be Liquid
Keep in mind that in order for reserves to count, they must be liquid. In other words, they must be able to be converted into cash quickly. Checking and savings accounts are obviously liquid, as are stocks and bonds, because you can liquidate them quickly. Real estate investments or cars are not liquid. Yes, you could sell them for cash, but it will take time, which doesn’t make them a good option as reserves.
It’s always a good idea to have mortgage reserves on hand, even if the loan program doesn’t require it. Homeownership is expensive and life is unpredictable. You never know when you may need to dip into your savings to make your mortgage payment. As a bonus, having the extra money on hand may help you get qualified.