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What Are Reserves?

Updated: Apr 1, 2019

When applying for a home loan, you will need to provide documentation that verifies both your income and assets.  As your lender, we want to review your income to ensure you can afford your monthly housing expenses.  We also need to verify that you have enough saved to cover the down payment and closing costs.  Another thing we are concerned with is your “reserves”, which is the amount of money that you’ll have left after paying your down payment and closing costs.  For example, if your total housing expenses (mortgage payment, property taxes, mortgage insurance, homeowner’s insurance, and HOA dues) are $3,000 and you will have $12,000 in assets after closing, then you would have 4 months’ worth of reserves ($12,000 / $3,000 = 4 months' reserves).

Is having reserves necessary?

It is important to have reserves because they demonstrate your capacity to save and, even more importantly, whether or not you’ll be able to continue making your mortgage payment in the event of a job loss or other financial emergency.  Typically, borrowers that have more reserves are less likely to default on their loans since they have the savings available to cover the mortgage payment and other housing expenses.

How are reserves calculated?

To calculate reserves, you must first determine your total liquid assets (checking, savings, CD, money market, brokerage account, mutual fund etc.).  Retirement account funds such as 401Ks and IRAs will also be factored, but we may only use a percentage of these funds.  Once we determine your total liquid assets, we’ll subtract your total closing costs and down payment, as applicable, to determine your actual reserves.

How many months of reserves are required?

There are a few factors that will determine the amount of reserves you’ll need, including property type (i.e. single-family residence, condo, 2-4 unit), occupancy type (i.e. primary residence, second home, investment property) and type of transaction (i.e. purchase, rate and term refinance, cash out refinance).  The typical range for reserve requirements is from zero to six months. 


Reserves are another reason why it’s important to plan ahead when applying for a new home loan.  Keep in mind that reserve requirements can vary widely depending on the type of transaction and conditions will apply if money has been shuffled around and/or any assets have been gifted.  To learn more about reserves and how they will pertain to your specific transaction, give us a call today.    

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