Essential Guide to Mortgage Reserves: Requirements and Tips

“`html

What Are Mortgage Reserves?

Mortgage reserves act as an emergency fund for your mortgage payments. They aren’t always required, and the amount needed can vary based on the type of mortgage and your specific situation. When required, you may need to show proof of assets that cover up to six months’ worth of expected monthly payments, sometimes more.

When Do You Need Mortgage Reserves?

The necessity and amount of mortgage reserves depend on several factors:

• Your credit scores
• Your debt-to-income ratio (DTI)
• Your loan-to-value ratio (LTV) and combined LTV (CLTV) ratios
• The type of mortgage
• The number of units in the property
• If it’s your primary residence

For instance, you might not need mortgage reserves if you’re getting a conforming conventional loan for a single-family home as your principal residence, with a credit score of 700, an LTV over 75%, and a DTI at or below 36%. However, you might need six months of reserves if your credit score is lower or if your DTI is above 36%. Mortgage reserves are more commonly required for investment properties or multi-unit properties.

How Much Are Mortgage Reserves?

If mortgage reserves are required, the amount is often measured in months and is based on your monthly principal, interest, taxes, and insurance (PITI) payments, including:

• Principal
• Interest
• Taxes
• Insurance
• HOA dues (if applicable)

For example, if your monthly expenses are $3,000, your mortgage reserve requirement might be six times that amount, or $18,000.

What Assets Can You Use for Mortgage Reserves?

The lender and loan type can influence which assets are acceptable as reserves. Generally, liquid assets—cash and funds that can easily be converted to cash—are accepted.

Acceptable Assets for Mortgage Reserves

• Checking and savings accounts
• Certificates of deposit
• Stocks, bonds, or mutual funds
• Money market accounts
• Retirement savings
• Cash in vested life insurance policies

If you don’t have enough reserves to qualify for the mortgage on your own, eligible gifted funds could be used to meet the reserve requirements.

Unacceptable Assets for Mortgage Reserves

• Stock options, restricted stock units, and other non-vested assets
• Money that you can’t access until retirement or job departure
• Stock in unlisted corporations
• Funds from an unsecured personal loan
• Money from parties interested in the home sale, such as the current homeowner, builder, developer, or real estate agent
• Credits or incentives from the lender

If you have these types of assets and need more reserves to qualify for a mortgage, discuss them with your lender. There may be exceptions or specific loans that accept some of these as mortgage reserves.

How to Build Your Mortgage Reserves

Building your reserves can be similar to saving for a down payment. Consider cutting discretionary expenses, taking on extra work, or finding other savings opportunities. Unlike your down payment and closing costs, you ideally won’t need to use your mortgage reserves.

Here are a few places to keep your mortgage reserves:

• High-yield savings accounts: These offer easy access to your money and attractive interest rates.
• Money market accounts: These savings accounts might offer higher interest rates for large balances.
• Money market funds: These mutual funds might offer returns similar to high-yield bank accounts.
• Certificates of deposit (CDs): CDs might offer higher interest rates but could have penalties for early withdrawal.
• Retirement accounts: Contributions to 401(k), IRA, or other retirement plans might count toward your reserves and offer tax benefits.

It’s a good practice to maintain an emergency fund for unexpected expenses in addition to your mortgage reserves. This helps ensure you don’t dip into funds set aside for other goals during a financial emergency.

Build Your Credit and Savings

Building up your cash reserves is crucial, especially if you have a high DTI or are buying a multi-unit property. Your credit score is also important. Higher credit scores can reduce the cash reserve requirement and qualify you for a lower interest rate. Monitor your credit with Experian for free to see where you stand while searching for your next home.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate the mortgage process and secure the best terms for your new home.

“`