What are mortgage reserves and when are they required?

When a lender asks for mortgage reserves, what do they mean?

If you have applied for a mortgage or purchased a home recently, you may or may not have heard the term reserves. A reserve, in connection with a mortgage transaction, simply means money on hand for emergencies. When a lender requests proof of 2 or 6 months of reserves (the most common requests), they are simply stating that you will need 2 or 6 months worth of mortgage payments left in assets after the loan is closed. It is further justification that you are qualified and the mortgage will be paid on time each month.

When are reserves most likely required? 

Reserves are often not required on the purchase or refinance of a primary home for a well qualified borrower with higher credit scores.

Reserves can be helpful for those loans that are a little bit outside that box. Borrowers with lower credit scores, those purchasing investment properties or second homes or with certain other circumstances may be required to show that they have mortgage reserves.

How do you show reserves?

Reserves are shown in the form of asset statements. Unlike funds required to close, mortgage reserves do not need to be liquid. A 401k account, IRA, savings account, money market account or other asset statement can be used to show a borrower's ability to pay should an emergency arise.

Fairly easy and quick topic today, but I think even the small items of a loan transaction are important.

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Website: Mortgages in Arizona

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