What are mortgage reserves and how much do you need?

Rob Daly/Getty Images

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

If you plan to take out a mortgage, you might need to account for more than the down payment and closing costs. In some cases, your lender could require you to have a certain amount of assets or savings, called mortgage reserves, that can be drawn from if your income changes or in 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 or other factors. 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 1 month for 1- or 2-unit properties; 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.

 Learn more:

Written by
Dhara Singh
Mortgage reporter
Dhara Singh is a mortgage reporter for Bankrate. She is a former data analyst turned financial journalist who previously worked at Yahoo Finance, CNET, Cashay.com and JPMorgan Chase covering the housing and retirement beats.
Edited by
Mortgage editor