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Why Do Some Lenders Require Cash Reserves?

When it comes to mortgages, there are a lot of guidelines that must be followed, all of which must come together in order to receive an approval. For many borrowers, this information is new to them and can be overwhelming. For instance, most people know what a down payment is, but not many know about cash reserves and how much they need to fulfill this requirement.

Cash Reserves

Cash reserves are the amount of cash that a borrower is required to have available over and above the funds that are needed for the down payment, closing costs and prepaid expenses. Reserves, calculated using the note rate, equal the amount for principal, interest, taxes, insurance and any assessments.

Mortgages require cash reserves in order to make sure the borrower has enough funds available just in case an unexpected financial issue comes up or something that may affect the borrowers ability to make the monthly mortgage payment.

What can be considered reserves?

Reserves can include cash in checking or savings accounts or any other liquid asset that can be quickly converted to cash (liquid or near-liquid financial assets). Funds must be able to be readily accessed by withdrawing funds from an account, selling an asset, redeeming vested funds or obtaining a loan secured by the asset from a fund administrator or an insurance company.

How Much Is Needed in Cash Reserves?

Some mortgage lenders will require that at least two months of cash reserves be available. However, this determination is normally performed by Fannie Mae and Freddie Mac automated underwriting systems and may vary depending on the overall information pertaining to the mortgage.

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