All You Need to Know about Mortgage Reserves

If you’re like most homebuyers, securing a mortgage will require having a significant amount of cash available. You’ll need funds for an earnest money deposit, a down payment, and closing costs. In some instances, you may also need additional funds known as cash or mortgage reserves. Your lender will ask for proof of these assets before approving your loan application.

What are mortgage reserves?

Mortgage reserves refer to cash or liquid assets that can be easily accessed to cover your mortgage payments if needed. These reserves are separate from the funds you’ll use for your earnest money deposit, down payment, and closing costs.

“Mortgage reserve requirements are generally based on the type of loan and the associated risk, rather than varying by lender,” explains Matt Dunbar, SVP of Southeast Region at Churchill Mortgage. “Higher-risk loans or those with less equity often require reserves to mitigate risk.”

Not every borrower will need reserves, however. Whether they are required depends on factors like your credit score, finances, the type of property you’re buying, and the loan you’re applying for. If reserves are necessary, the lender wants assurance that you have enough savings or liquid assets to cover mortgage payments if your income is disrupted.

Reserves are typically measured in months. For instance, if your lender requires four months of reserves, you’ll need liquid assets equivalent to four months of mortgage payments.

What assets are allowed as mortgage reserves?

The following assets are commonly accepted as reserves for conventional loans:

• Vested retirement funds (e.g., 401(k), Roth IRA)
• Stocks, bonds, mutual funds, and money market funds
• Certificates of deposit (CDs)
• Cash value of vested life insurance policies
• Trust funds

What assets aren’t allowed as mortgage reserves?

Certain assets typically don’t qualify as reserves, including:

• Non-vested funds
• Funds that can only be accessed in retirement or in cases of job loss or death
• Unsecured loans (e.g., personal loans)
• Proceeds from a cash-out refinance
• Lender contributions
• Stock in unlisted corporations

When do you need reserves for a mortgage?

Most borrowers don’t need to provide cash reserves for a mortgage unless specific circumstances apply, such as purchasing a particular type of property or compensating for factors like poor credit, a low down payment, or a high debt-to-income (DTI) ratio. For example, homebuyers with a credit score below 700 and a down payment under 20 percent might need reserves equivalent to six months of mortgage payments.

Even buyers making a larger down payment could still be required to have reserves if their credit score is in the 600s. In such cases, lenders might ask for two to six months’ worth of reserves.

Self-employed borrowers often need reserves as well, especially if they lack steady paychecks or a consistent income stream.

Real estate investors may also need cash reserves that lenders can verify, particularly if their repayment plan depends on rental or lease income generated by the property.

“Jumbo loans and investment properties usually come with reserve requirements,” says Matt Dunbar, SVP of Southeast Region at Churchill Mortgage. “In cases where a lender is making an exception or where risk factors exceed typical guidelines, verified reserves can be crucial to securing loan approval. These reserves give lenders confidence that the borrower can handle payments, even if their financial situation changes unexpectedly.”

How much are mortgage reserves?

If mortgage reserves are required, the amount needed usually depends on the type of loan you’re applying for and the property you’re purchasing. While each lender may have its own criteria, the standards outlined by American Financing, a Colorado-based lender, are generally representative:

Conventional loan	2 to 4 months for second homes 6 months for cash-out refinances with a DTI ratio above 45% 6 months for investment properties 6 months for primary residences up to 4 units
FHA loan	None required for 1- or 2-unit properties 3 months for 3- or 4-unit properties
VA loan	None required for 1- or 2-unit properties 3 months if borrower includes rental income from an existing rental property for qualifying purposes 6 months for multi-unit properties if borrower includes expected rental income for qualifying purposes
USDA loan	No requirement

Primary residence	Up to 6 months
Second home	2-4 months or more
Investment property	6 months or more

How to build your mortgage reserves

If your lender requires mortgage reserves and your current assets are limited, you’ll need to take steps to boost your savings before applying for a loan. Here are some strategies to help you build up your reserves:

1. Cut down on spending

Review your budget and look for ways to cut expenses. You might cancel unused subscriptions, shop more efficiently at the grocery store, or switch to a less expensive car insurance provider. Deposit the savings into a separate account that is easy to access but not used for daily expenses.

2. Set aside a portion of income

Regularly contribute a portion of your income to a savings account designated for reserves. Automating these deposits can simplify the process and help you steadily build your reserve funds.

3. Consider a CD

If you don’t need immediate access to your funds, a CD might be a good option. CDs generally offer higher interest rates than savings accounts, helping your reserves grow faster. Just ensure you choose a term that aligns with your timeline for applying for the mortgage.

4. Move into the money markets

Money market accounts (MMAs) offer a higher interest rate than traditional savings accounts and provide easy access to your funds. Alternatively, a money market fund, available through brokerages, can offer even better returns but may require higher minimum balances. Keep in mind that money market funds are not FDIC-insured.

5. Increase contributions to your retirement account

If you have vested retirement funds, increasing your contributions to retirement accounts like a 401(k) or IRA can also help build your reserves. These accounts can be a valuable source of funds when needed.

6. Save money from windfalls

Allocate any bonuses, commissions, or tax refunds into your reserve fund. Regularly saving these additional funds can significantly boost your reserves.