What Are Reserves?

Short answer

Reserves are the liquid assets you still have after paying your down payment and closing costs, measured in months of your full housing payment (PITI plus HOA). If your payment is $4,000 and you have $12,000 left after closing, you have three months of reserves. Requirements depend on the program, property type and risk: some loans need none, while jumbo, investment and non-QM loans often require 6 to 12 months.

Definition

Reserves are a cushion that shows the lender you can keep paying if income is interrupted. They are verified from bank, brokerage and retirement statements, and must remain after all funds for closing are accounted for.

Worked example

An investor buys a $500,000 rental condo in Doral with a DSCR loan: 25% down ($125,000) plus closing costs of about $14,000, so $139,000 needed at closing. Monthly PITIA (including $450 HOA) is $3,900. The lender requires six months of reserves: 6 x $3,900 = $23,400. He also owns two other rentals with payments of $2,800 and $2,200, and the lender wants two months on each: 2 x ($2,800 + $2,200) = $10,000. Total reserves needed: $33,400. Total verified assets needed: $139,000 + $33,400 = $172,400. His checking shows $90,000 and his brokerage $110,000 (counted at 100% by this lender), so he qualifies with about $27,600 to spare.

What counts as reserves

• Checking and savings balances after closing funds are subtracted.
• Stocks, bonds and mutual funds in brokerage accounts (some lenders discount them).
• Vested retirement accounts such as 401(k) and IRA, usually at a reduced percentage.
• Cash value of life insurance and, for some programs, business funds with a CPA letter.
• Not counted: unsecured borrowed money, cash on hand, assets you cannot document, and on some programs gift funds.

How much you need

Each program sets its own rule, and automated underwriting may require more for riskier files. Primary-home conventional and FHA loans often need few or no reserves; second homes, investment properties, jumbo loans and DSCR loans usually need several months, plus additional months for other properties you own. More reserves can also help offset a high DTI.

In South Florida

Reserves hit South Florida buyers harder because the monthly payment that defines a 'month' is large: taxes on a new purchase, windstorm and flood insurance, and condo HOA dues all inflate PITIA. Six months on a Brickell condo can be $30,000 or more. Jumbo and foreign national lenders here often ask for 12 months. Foreign assets usually count if documented and, for some lenders, if moved to a U.S. account. Retirement accounts typically count at a discount. Gift funds count as reserves on some programs but not on others.