Mortgage Lenders Ask For Reserves

Why Do Mortgage Lenders Ask For Reserves From Borrowers

Gustan Cho Associates are mortgage brokers licensed in 48 states

This article covers why mortgage lenders ask for reserves from borrowers. Why Do Mortgage Lenders Ask For Reserves For Borrowers? Not all borrowers are required to provide reserves on a home purchase. The main reason why do mortgage lenders ask for reserves is when the Automated Underwriting System conditions for it. Here are cases when the Automated Underwriting System would condition and require reserves.

Borrowers with under 620 credit scores may be required to create one month of reserves. Mortgage underwriters may require borrowers with high debt-to-income ratios reserves.

Borrowers with little to no traditional credit tradelines may be required to develop reserves. Underwriters may require borrowers with many outstanding collections to be charged off the account reserves. Borrowers with late payments after a housing event or bankruptcy may be required to develop one to three months of reserves. This article will discuss when and why mortgage lenders ask for reserves and what reserves are.

What One Month’s Reserves Consists of

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Still, the automated underwriting system may require anywhere between one month of reserves ( PITI ) and up to six months in reserves, depending on the income and profile of the mortgage loan applicant. The mortgage underwriter will most likely ask for three months’ reserves for mortgage loan files that go through manual underwriting. Reserves serve as great compensating factors. Reserves are one month’s P.I.T.I.

  • principal
  • interest
  • taxes
  • insurance

Reserves cannot be gifted and need the borrower’s qualified funds. Reserves do not have to be cash. It can be in the form of an IRA, Investment Account, or 401k.

Reasons Why Do Mortgage Lenders Ask For Reserves

Why do mortgage lenders ask for reserves? Sometimes, the Automated Underwriting System (AUS) will not condition reserves, but the individual mortgage underwriter will. Lenders with mortgage overlays can request additional mortgage requirements than the minimum mortgage guidelines.

What Are Reserves 

Reserves are one month of housing payments normally consisting of principal, interest, taxes, and insurance, also called PITI. In some cases, the automated underwriting system will ask borrowers for reserves, especially from mortgage loan applicants with credit scores of under 620. The amount of reserves a borrower requires varies from mortgage loan applicant to mortgage loan application.
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Why Do Mortgage Lenders Ask For Reserves From Some Borrowers and Not Others?

There are reasons why do mortgage lenders ask for reserves. Reserves are not requested for all mortgage loan applicants. Reserves are normally requested for mortgage loan applicants who might have been short-term on the job, have high debt-to-income ratios, have prior bad credit, or have poor financial profile.

You can gift funds for the down payment on a home purchase from a family member or relative. 100% of gift funds can be used towards the down payment of a home purchase.

Gift funds cannot be used as reserves. Reserves need to be the mortgage loan borrower’s funds. Reserves do not have to be in cash.  401k, IRA, retirement, and investment accounts can all be used as reserves. However, if you use 401k or retirement funds for reserves, only 60% of the value of the 401k or retirement funds can be used for reserves.

What Are My Options If I Do Not Have Reserves

What are my options if I have no reserves?There are many cases where the mortgage loan application cannot meet the reserves requirement by lenders. This often causes delays in mortgage loan closings. Large and irregular deposits are considered unsourced funds. It cannot be used in the mortgage world. All irregular and larger deposits need to be sourced.

Case Scenario on How To Come Up With Reserves During Mortgage Process

For example, here is a case scenario: You can use a $10,000 irregular deposit from the sale of a vehicle as sourced funds and for reserves. You need a copy of the check from the car buyer. Borrowers need a copy of the bill of sale. The borrower needs a copy of the title. You also need a copy of the deposit slip. After the deposit, I need an updated bank statement showing the $10,000 deposit. However, if the car seller received cash from the auto buyer and just deposited the cash into the bank account, those funds are not considered sourced funds. It cannot be used as a reserve. The deposit and those funds will not be considered qualified by a mortgage underwriter.

Why Do Mortgage Lenders Ask For Reserves During the Mortgage Process

There are two options borrowers have with no verified funds for reserves. One is to wait to get payroll paychecks deposited until they meet minimum reserve requirements. As mentioned above, getting gift funds cannot be used for reserves. So, that option is out of the picture. Can sell certain items. But we need proper documentation to source the funds, such as selling a vehicle or other large ticket items.

Creative Ways of Showing Reserves

Option two is to add the name to a family member’s bank account as a joint account holder. An account containing seasoned funds such as a checking or savings account. We will discuss a case scenario once a name is added to a family member’s or business associate’s checking or savings account.

After adding the name as a joint account holder, you need to get 60 days of bank statement printouts. Get every page signed, stamped, and dated by the teller, reflecting that the reserves have been seasoned for 60 days.

Any large or irregular deposits need to be addressed. Once the name is added to the other person’s bank account, get 60 days of bank statement printouts. Get it signed, dated, and stamped by the bank teller. Also, we need a letter signed and dated by the main account holder stating they have full access to the bank account. This option works all the time.

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Why Do Mortgage Lenders Ask For Reserves If It Is Not Enforced After Closing

The mortgage lender does not enforce reserves after the home closes. Whatever happens after closing is no longer the mortgage lender’s business. Homeowners are free to do whatever they want. With the reserves, you can buy furniture, a car, or other high-ticket items.

Reserves Are Normally Required For Multi-Unit Properties

Why do mortgage lenders ask for reserves from borrowers buying three to four-unit multi-family homes?  Reserves show the borrower has skin in the game. In the event the borrower cannot make a mortgage payment due to repairs being needed, they have reserves to count on. 3 to 6 months of reserves may be required for 3 to 4-unit and investment properties.  It does not matter how great a mortgage loan applicant’s credit or financial profile is. If you have any questions about the contents of this article or other mortgage-related topics, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at

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