Reserves Explained

In the mortgage business, the word "reserves" has more than one meaning. It can refer to the monies (assets) required by the lending bank - to be on hand in the borrowers deposit accounts at the time the loan closes.

When a lender is asking for seasoning or reserves on assets, this usually is refering to liquid assets such as checking and savings. The lender uses the borrowers assets as a indicator for measuring the borrower's ability to repay a loan. The assets also show the borrowers pattern of savings and ability to support financial obligations.

Most lenders want a borrower's reserves to be seasoned for a minimum of 60 days. Seasoned means that they must show proof that they have had this money for at least 60 days. A lender doesn't want to see that a borrower just had a large amount of money deposited into their account just recently, or they will require proof of where the money came from along with a letter of explanation. This safeguards the lender that the borrower has not incurred a new debt or loan that needs to be calculated into their debt to income ratio.

Though a borrowers 401k accounts are used to show these reserves, the money in the 401k account is not actually drawn out it is simply shown to be available.

Although proceeds from the sale of your previous home are not technically "seasoned", they may be used for the down payment of a new purchase, as well as the necessary closing reserves.

A Verification of Deposits (VOD) is often used to show both source and seasoning of reserves or assets. This is a form that is filled out and signed by an official of the depositing institution that verifies such things as the current balance, daily deposit average, account numbers and other information.

Fannie Mae continues to tighten up approval guidelines.

By putting accurate reserves on your 1003, you actually will receive LESS DOCUMENTATION requirements! Most often, Fannie will only require verification of some of the funds listed, not all (for example, borrowers may have checking, savings, and retirement totaling $12,500, but D.U. findings may need NONE verified, or perhaps only $500 verified...then you do not need to send in all asset verifications, just the $500)

Remember - every little bit helps!!

Checking Accounts count at 100% of balance (recent large deposits may need to be explained)
Savings Accounts count at 100% of balance (recent large deposits may need to be explained)
Stocks / Mutual Funds count at 100% of balance
401k / IRA count at 70% of vested balance
Cash balance for life insurance policies count at 100% of cash balance
Most other retirement accounts may not count, including pensions, PERA accounts, etc.

You can usually count the cash value of a life insurance policy as well.

The other form of "reserves" in a mortgage transaction are those monies required by the lender to go in escrow, if one is created.

Many wonder why reserves are sometimes required. This gives the lender more sense of security when lending you the money for your home. If any life changing situations should occur, and you have 6-12 months of "reserves" available, you are likely to use these funds to make your payments in order to keep your house. This makes you less of a risk in the lenders eyes.

With retirement accounts you may be required to contact your human resource department to get a statement explaining how readily available these accounts would be and what the process for taking any money out would be.

Reserves are assets that a home buyer has after settlement. It is one of four underwriting criteria, as with credit, income, and loan-to-value ratio. Most banks require borrowers to have 3 to 6 months worth of housing expenses in reserve after closing. Reserves do not have to be liquid. They can be in the form non-liquid investments such as stock securities, bonds, retirement funds, etc.

Many banks do not consider state controlled retirement funds when using borrowers deposit records to detrmine how much cash reserves they have. This is because many state controlled retirement funds are inaccessible to their contributors.

As a General rule, Higher cash reserves are typically required for investment property. Lowest cash reserves are required on a Primary Residence.

The reserves required on a subprime loan usually depends on the type of loan. More reserves are usually required for higher risk loans such as stated income or non owner occupied loans.

Reserves are a term for the assets the borrower has left over after the down payment has been paid. Reserves can include retirement accounts, investments and checking accounts.

» DISCLAIMER: The information contained in this article on 'Reserves Explained' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.