Mortgage reserves are the number of months of mortgage payments you have in cash or liquid assets after your down payment and closing costs are paid.
Reserves are in addition to your down payment and closing costs. They show the lender you have a financial cushion if something goes wrong.
Most primary residence loans require 2-6 months of reserves. Investment properties require 6-12 months. The exact amount depends on your credit score and loan type.
What Counts as Reserves
Eligible reserves: cash in checking/savings, money market accounts, CDs, stocks and bonds (typically at discounted value), and vested retirement accounts (often at 60% of value). Ineligible: borrowed funds, gifts (sometimes), and non-liquid assets.
How Many Months Required
Primary residence: FHA often requires 1 month, Conventional typically 2-6 months (higher for 2nd homes), VA generally no requirement but recommended. Investment properties: 6-12 months typical.
Where to Keep Reserves
Keep reserves in a readily accessible account. Lenders want to see the money is liquid. Retirement accounts count but at a reduced percentage. Avoid moving large sums between accounts right before closing.
Investment Property Rules
Investment properties nearly always require reserves: 2 months if you own 1-4 properties, 6 months for 5-6 properties, 12 months for 7+ properties. The more properties you own, the higher the reserve requirement.
How Reserves Affect Approval
Reserves can make the difference between approval and denial, especially for borderline DTI ratios. Having extra reserves can also help you qualify for a better rate or a larger loan amount.
Tips for Meeting Reserve Requirements
Start accumulating reserves early. Keep them in a separate savings account. Don't use retirement funds for reserves if you can avoid it. Document the source of your reserves clearly.