You’ve saved for a down payment, and you’re ready to cover closing costs. But do you have enough cash and assets to cover your mortgage reserves?
Lenders sometimes require that homebuyers have mortgage reserves in order for the loan to be approved at application and then funded on the day of closing. But what are mortgage reserves, and how much might you need to have set aside? Below, we’ll review what assets qualify as mortgage reserves and when you might need them.
Key Points
• Mortgage reserves are cash and assets that homebuyers can access to cover mortgage payments for a set number of months in case of financial setbacks.
• Assets that qualify as mortgage reserves include money in deposit accounts, stocks, bonds, trust accounts, cash value in life insurance policies, and vested retirement funds.
• Mortgage reserve requirements vary by loan type and lender.
• Lenders may have stricter mortgage reserve requirements for borrowers with low credit scores, high debt-to-income ratios, or small down payments.
• Tips for building mortgage reserves include decreasing spending, using certificates of deposit, setting aside a portion of income, taking up a side gig, and boosting retirement contributions.
What Are Mortgage Reserves?
Mortgage reserves are the cash and other assets that homebuyers can access in the event they need help covering their mortgage payments for a set number of months. Such reserves are a kind of fail-safe in the event a buyer is laid off or otherwise loses a revenue stream.
In some cases, lenders require you to prove you have such reserves before funding your home mortgage loan. Requirements can range from as little as one month of reserves (i.e., all your mandatory housing costs for a month) to six months or more.
Luckily for homebuyers, lenders consider more than just the money in your checking and savings accounts as mortgage reserves. Money and assets that can be classified as mortgage reserves include:
• Money in a deposit account (not only checking and savings, but also money market accounts and certificates of deposit)
• Stocks and bonds
• Trust accounts
• Cash value in a life insurance policy
• Vested retirement funds, such as money in 401(k)s and IRAs
Keep in mind that money in your savings account that you’ll use for the down payment and closing costs does not count toward your mortgage reserves. Mortgage reserves are money and assets that you will have access to after closing.
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Do All Types of Mortgages Require a Reserve?
Not every borrower will need mortgage reserves when buying a home. Requirements depend on the type of mortgage you’re applying for, as well as your overall financial picture (credit score, debt-to-income ratio, and size of your down payment, for instance).
The table below breaks down potential mortgage reserve requirements by loan type:
| Type of Mortgage | Mortgage Reserve Requirements |
|---|---|
| Conventional | 0-6 months |
| FHA (Federal Housing Administration) | 0-3 months for one- and two-unit properties 3 months or more for three- and four-unit properties |
| VA (U.S. Department of Veterans Affairs) | N/A for one- and two-unit properties Variable for three- and four-unit properties or if existing or anticipated rent is used to qualify |
| USDA (U.S. Department of Agriculture) | N/A |
Why do these requirements vary? Lenders may have different rules depending on whether a government agency is guaranteeing the loan, or whether the home will be your primary residence or if it’s an investment property.
Lenders may also have stricter mortgage reserve requirements if you’re making a small down payment, you have a high debt-to-income ratio, or if your credit score is too low (typically anything below a 700 credit score can warrant larger reserves if the borrower is making a down payment of less than 20 percent).
Recommended: Tips to Qualify for a Mortgage
Tips for Building Your Mortgage Reserves
Saving up for a down payment can be challenging on its own, but cobbling together enough cash reserves for a mortgage loan can make it even tougher. Here are some tips for building your home loan reserves:
Decrease Spending
Take a good, hard look at your budget to figure out how to stop spending money that you could be saving. Common culprits include dining out, streaming services, cups of coffee on your way to work, and memberships and subscriptions. Determine what you can cut out of your life — just for now — to reduce your monthly spending.
You may also be able to lower your utility bills by making some simple, eco-friendly updates in your current home. Also consider carpooling or using public transportation to reduce fuel costs, and raise your deductible on your car insurance to get a lower monthly premium. Finally, clip coupons and look for deals when shopping for groceries.
Use a Certificate of Deposit
If you know you’ll be buying a home within a few years, store some savings in a certificate of deposit (CD). Though the money is less liquid than funds in a savings account, it still counts toward your mortgage reserves and a CD may offer a higher interest rate, so your money will grow faster.
Set Aside a Chunk of Your Income
When you get each paycheck, intentionally move some into a high-yield savings account that’s earmarked for your mortgage reserves. (You can also do this when saving for the down payment for your home.)
Automatically setting aside some of your income for a specific purpose can make it a lot easier to resist the temptation to spend it on other things, like clothes and vacations.
Take Up a Side Gig
If you’ve cut all the expenses you can and you’re still coming up short, think about how you can earn more money. You can always ask for a raise at work, but you may have more luck taking on a side hustle to earn extra income. That doesn’t always mean getting a second job — there are passive income ways to build wealth.
Boost Your Retirement Contributions
Mortgage reserves don’t have to be money in your bank account. Retirement contributions to IRAs and 401(k)s (if vested) also count toward your reserves, and these may grow faster than money in a high-yield savings account, depending on how the market is doing.
Even better, if your employer matches contributions to a 401(k), that’s an easy way to quickly increase your mortgage reserves. And it’s free money!
What Happens If You Don’t Meet the Mortgage Reserve Requirements?
Mortgage reserve requirements are called that for a reason: They’re required. Just like the down payment and closing costs, if your lender asks for mortgage reserves, you will absolutely need them in order to have your mortgage loan funded. You’ll be asked to note these assets on a mortgage application.
If the lender discovers prior to the closing that you don’t have the reserve for the mortgage, it can back out.
The Takeaway
Mortgage reserves are cash and assets you can use to cover your housing costs for a set number of months if something happens and you suddenly can’t afford your mortgage. Depending on your credit score, down payment, the type of property you’re purchasing, and the type of mortgage loan you’re looking for, you may need to have mortgage reserves set aside in order to get approved for a home loan.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
What is the difference between cash reserves and mortgage reserves?
Mortgage reserves are a type of cash reserves. Cash reserves broadly refers to money set aside for short-term needs and emergencies, like sudden job loss; cash reserves can get you through a certain number of months’ worth of expenses. Mortgage reserves are money and assets put aside specifically to cover housing costs for a set number of months and may be required for some home loans.
Mortgage reserves are specifically money set aside to cover housing costs for a set number of months and may be required for some home loans.
Can I use retirement savings as mortgage reserves?
Retirement savings can count toward your mortgage reserves. If you’re using 401(k) funds in the total calculation, they must be vested.
How long do I need to maintain mortgage reserves?
Lenders may require mortgage reserves as a condition of giving you a mortgage. Usually, they can’t ensure that you keep that money on hand after the closing. However, it’s a good idea to have mortgage reserves available if you need them, especially since assets like retirement accounts qualify;
Can I use gift funds for mortgage reserves?
You can use gift funds for mortgage reserves for an FHA loan, as well as certain other loans with some restrictions. Gift funds refers to money or assets donated to a homebuyer, usually from a loved one, without the expectation of repayment.
Photo credit: iStock/FilippoBacci
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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