What Are Reserves?
Reserves are liquid or near liquid assets that are available to a borrower after the mortgage closes. On every loan transaction, reserves are required to be verified as part of the approval process. Acceptable sources or reserves include:
- Checking or savings accounts
- Investments in stocks, bonds, mutual funds, COD, money market funds, and trust accounts
- the amount vested in a retirement savings account
- the cash value of a vested life insurance policy
How much is needed for reserves?
For an investment property, 6 months of subject property monthly payment is required.
If the borrower owns other financed properties, additional reserves must be calculated and documented for financed properties other than the subject property and the borrower’s principal residence.
- 2% of the UPB if the borrower has one to four financed properties,
- 4% of the UPB if the borrower has five to six financed properties, or
- 6% of the UPB if the borrower has seven to ten financed properties.
The aggregate UPB calculation does not include the mortgages and HELOCs that are on
- the subject property,
- the borrower’s principal residence,
- properties that are sold or pending sale, and
- accounts that will be paid by closing (or omitted in DU on the online loan application).
The subject property will still have monthly reserve requirements based on the total mortgage payment (PITI). Reserves are funds that you have access to liquid or non-liquid. Reserves are funds you need to have after the closing your transaction. Funds for reserves cannot be your funds for down payment or closing cost.
Fannie Mae now will allow for 100% of the Non-Liquid funds, not 60%
Non-Liquid funds can be used for reserve requirements.”
- SEP Funds
Gifts are NOT allowed on an investment property.