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What are mortgage reserves and how much do you need?

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Setting aside cash for a down payment and closing costs is an important part of preparing to buy a home, but these two expenses are not the only requirements you need to think about.

If you plan to take out a mortgage to buy a home, your lender may also want to see a healthy savings account or some other type of assets that can be used as mortgage reserves. Having financial reserves shows lenders you will be able cover your mortgage should there be any changes in your income or an emergency.

What are mortgage reserves?

Mortgage reserves are the assets, like cash, that you have easy access to if you were to need help covering your mortgage payments. These assets are what you have left over after you make a down payment and pay closing costs.

Reserves are measured in months, so if you have $7,200 in a savings account, for example, after you close on your loan, and your monthly mortgage payment is $1,200, you’d have six months’ reserves.

Reserves aren’t limited only to cash in your bank accounts. There are other types of assets that qualify, including:

  • Vested funds in retirement accounts, such as a 401(k) or IRA
  • Stocks, bonds, mutual funds and money market funds
  • Certificates of deposit (CDs)
  • Cash value of an insurance policy
  • Funds in a trust

When do you need reserves?

Most borrowers don’t need mortgage or cash reserves, unless they’re buying a certain type of property or their application could use a boost due to poor credit, low down payment or a high debt to income ratio.

Homebuyers with a credit score of 700 or lower for instance, who are making a down payment of less than 20 percent, may be required to have six months in financial reserves available to get approved.

Even homebuyers making a more substantial down payment, of as much as 25 percent, may still be required to have mortgage reserves if their credit score is in the 600s. Having cash reserves to cover anywhere from two to six months of mortgage payments may be required in such cases.

If you’re an investor or self-employed, you might need to have reserves, as well.

In general, though, reserves are smart to have in case of an emergency, such as a job loss, because they help substitute for lost income.

“I generally tell people to have at least six months of mortgage payments in the bank,” says Scott Sheldon, branch manager at New American Funding in Santa Rosa, California. “This can be money that’s cumulative across their bank, stocks, bonds and even IRA funds.”

Mortgage reserve requirements by loan type
Conventional loan 0-6 months, depending on credit and DTI/LTV ratios
FHA loan 3 months for 3- or 4-unit properties
VA loan 6 months for 3- or 4-unit properties
USDA loan No requirement

Mortgage reserve requirements by property type
Primary residence 2-6 months
Second home 2-4 months
Investment property 6+ months

“Multi-unit properties require more reserves as do investment properties,” says John Stearns, mortgage banker at American Fidelity Mortgage in Milwaukee, Wisconsin. “The reserves will be based on how much borrowers owe on these investment properties.”

How to build your mortgage reserves

1. Cut down on spending

Look at your budget and see if there are any areas you can cut back spending in. You can try to negotiate lower costs for a recurring bill such as cable, for example, shop smarter at the grocery store or find a cheaper provider for your car insurance.

2. Set aside a portion of income

Since your savings accounts qualify as reserves, you can augment these by putting aside some of your income in these accounts each month. Consider setting up automatic deposits to make it even easier to stash money away.

3. Consider a CD

If the interest rate on your savings account isn’t cutting it and you’re several months away from getting a mortgage, consider a certificate of deposit (CD). CDs are an acceptable reserve asset, and CD rates tend to be higher than savings account rates, giving you a better return.

4. Find a side gig

In today’s economy, side hustle opportunities are plentiful. Finding one that interests you can be a helpful way to accumulate savings quickly. Some of the top side hustles include selling items through online marketplaces, tutoring, freelance writing and working as a ride hail driver.

5. Increase contributions to your retirement account

Vested money in 401(k) funds is an acceptable form of mortgage reserves. If you’re only contributing the minimum to your retirement accounts, consider an increase. This is particularly important if your employer provides matching contributions. You should at least be contributing enough to max out the employer matching funds, which will help increase your retirement fund more quickly.

Written by
Dhara Singh
Mortgage reporter
Dhara Singh is a former mortgage reporter for Bankrate.
Edited by
Reviewed by
Senior mortgage loan originator, American Fidelity Mortgage