What Are Mortgage Reserves?

Certified Mortgage Advisor
NMLS 1701021
December 13, 2018

What are mortgage reserves?

Let's talk about mortgage reserves. So what are they and how do they affect you? So mortgage reserves simply are extra money left over in our bank account after we close to make sure that we can make the mortgage payments.

Why would a lender want to see reserves in your bank account?

The main reason a lender would want to see reserves in your bank out is they can make sure that you are not depleting your bank account by closing on a house. So let's say your total closing costs cash to close when you're buying a house is $5,000. If you have $5,500 in your bank account, what they know is that after you close on your house, you're gonna only have $500 left and you might not be able to make the payment for next month.

Lenders want to make sure your bank account will not be emptied

So what the lender's wanting to make sure of is that when you're closing on a house, you're not wiping your bank account completely out.

Good credit score might save you from reserves

So not all loans require reserves. If you have a great credit score, you're putting a substantial amount of money down, maybe 15, 20% or more. You're most likely not going to have a reserve requirement. But if you have a credit score, that's a little bit lower or you're going into some different types of products, like a jumbo product, then you might have some reserve requirements.

Now, usually, this can look anywhere from three to six months of reserves. And what that means is if your housing payment is a thousand dollars per month, three months of reserves is $3,000.

Mortgage reserves can help you

So after closing, the lender wants to know that you have $3,000 in your bank account. Leftover as reserves in case they're needed. So this also helps you because what the lender's trying to do is a level of risk mitigation.  They wanna make sure that you'll be able to afford this loan and that you're not gonna have financial stress with the loan.

So if they feel like there's an event in the future where closing on this property is gonna wipe out your bank account, they wanna make sure that's not going to happen and that you feel comfortable and have the ability to repay this mortgage. These are all things that have been put in place after the financial crash or the housing crash in 2008.

This will protect you from financial stress

The reason all of these things are put in place are really to protect you and to protect the economy and to make sure that we're all having increased wages, increased returns on our savings, and we're in mortgages that make sense and don't bankrupt us. So if we talk about reserves, that's what they are.

Reserves is your money, it will not be used paying your loan

It's not money that you have to give to the lender. What we're saying is you're gonna have your cash to close the amount. So our cash to close is the down payment. Plus closing costs added on top and your reserves are anything on top of that, right? So when you're bringing money to closing, it's only down payment and your closing costs, but reserves stay with you.

They're never an amount that you have to pay, but they're an amount that the lender's going to ask to be verified in your account. That way that money is there after closing.

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