Mortgage 101: What Are Mortgage Reserves?

During the process of your home loan your loan professional might ask you about your reserves, but what exactly do they mean?

A commonly misunderstood aspect of getting a mortgage is reserves.  And no, we're not talking about the strawberry and peach kind your mom used to make in the summer time.  A good way to think of reserves is something "left over."  When buying a home, reserves are essentially how much money you have saved up in case something goes wrong.  Six months of reserves would be considered as having enough money in savings to pay your mortgage for six full months if you were to lose your job or get injured.  This is just a precaution to ensure that your mortgage will be paid on time each month.

When are mortgage reserves required on a home loan? 

Not all home purchase or refinance transactions require reserves, especially if you have a good credit history. However, it's still important to understand what reserves are.    Most government loans such as USDA, VA, and FHA do not require any reserves, however providing them at time of application and underwriting can help to make your file look stronger.  Often times, reserves can also be helpful when purchasing a second home or investment property.  

How are reserves proved in the home loan process?

To show reserves to your lender you will need some form of an asset statement, depending on where your funds are kept.  The funds do not have to be liquid so a 401k account or IRA account will do.  You can also provide a statement for a savings, checking, or any other accounts that you may have.  Usually the lender will need to see at least 60 days worth of account statements to show that the money is sourced and seasoned; meaning it was not gifted to you for the purpose of the loan.  

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