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What Does Reserves Mean When The Mortgage Underwriter Conditions it
There are instances when mortgage underwriters will require reserves from borrowers. What does reserves mean? Can equity in the home or 401k be used for reserves? How about if you have a paid off vehicle or precious metals? Or what if you have hard core cash. Can those be used for reserves?
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2 Replies
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Reserves is when a lender require additional funds for borrowers that is the borrower’s own funds. One months of reserves means one month of Principal, Interest, Taxes, and Homeowners Insurance (PITI). All manual underwriting FHA and VA loans require one months of reserves. Multi-Family mortgage loans require one months of reserves on two units, three months of reserves on three to four unit owner occupant properties and six months of reserves on investment property multi-family units. When a mortgage underwriter conditions for “reserves,” it typically means they are requiring the borrower to have a certain amount of liquid assets (cash or cash equivalents) left over after closing on the mortgage loan.
Reserves are essentially a pool of funds that the lender wants the borrower to have available as a safety net in case of financial hardship or a disruption in income. The required amount is usually calculated based on the borrower’s monthly housing costs and other debt obligations.
Some common reasons why reserves may be conditioned:
- Risk Mitigation: Lenders see reserves as a way to reduce the risk of default, as the borrower would have funds to cover mortgage payments if they temporarily lost their job or had another financial setback.
- Investment Properties: If the mortgage is for an investment property instead of a primary residence, higher reserves are usually required (e.g. 6-12 months of mortgage payments).
- Loan Program Requirements: Certain loan programs like jumbo loans often have reserve requirements written into their guidelines.
- Compensating Factor: Strong reserves can sometimes allow lenders to compensate for other risk factors like high debt-to-income ratios.
The amount of reserves required can vary based on the lender’s policies, loan amount, property type, and the overall risk profile of the borrower. Typical reserve requirements range from 2-12 months of housing costs. The borrower must provide documentation like bank statements to evidence they have sufficient assets remaining after closing to satisfy the reserve condition.
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When a mortgage underwriter conditions for “reserves”, it typically refers to the requirement for the borrower to have a certain amount of liquid assets or cash reserves left available after closing on the mortgage loan. You cannot get a gift for reserve funds or borrower reserves when requested by the mortgage underwriter. Here’s some more detail on what reserves mean in this context: Purpose of Reserves: Serves as a financial safety net for the borrower in case of job loss, reduction of income, or other financial hardships that could impact their ability to make mortgage payments. Lenders see reserves as a way to mitigate their risk and increase likelihood the borrower can sustain the mortgage obligation.
How Reserves are Calculated:
- Typically based on a multiple of the borrower’s monthly housing costs (principal, interest, taxes, insurance).
- Common requirements range from 2-6 months’ worth of housing costs, but can go higher for riskier loans or investor properties.
When Reserves are Required:
- Often a condition for loans with higher debt-to-income ratios, lower credit scores, or other risk factors.
- Investor properties or second homes almost always require a minimum reserve amount.
- Jumbo loans, which exceed conventional loan limits, frequently have reserve requirements as well.
Funds Allowed for Reserves:
- Can include cash or cash equivalents like money market funds
- Vested retirement accounts are also usually accepted towards reserve requirements
- Reserves must be verified by the underwriter through asset statements
The amount of required reserves can vary significantly by lender and loan type. But in general, they provide an emergency fund cushion for the borrower after accounting for down payment and closing costs.
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Reserves Requirement On Home Loan By Mortgage Lenders
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