What are Reserve Funds

There are a lot of costs when it comes to getting a mortgage.

Closing costs, the down payment, the home appraisal, and inspection.

But, your lender doesn’t want to see you go broke after you close on a mortgage, so they will often require reserve funds equal to a few months’ worth of mortgage payments.

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What are Reserve Funds?

Reserve funds refer to money that sits in your checking or savings account to cover future expenses, like mortgage payments. Your monthly income should be enough to cover your ongoing monthly expenses, so the reserve funds will not decrease over time.

Reserve funds are money that is set aside in your checking or savings account to cover unexpected costs or future financial obligations such as a mortgage payment.

How Much Reserve Funds Do You Need for a Mortgage?

Lenders want to see borrowers with at least 6 months’ worth of mortgage payments in reserve funds.

For example: If your monthly mortgage payment is $2000, you will want to have at least $12,000 remaining in your savings account at closing.

Reserve Funds Needed by Loan Type

Reserve funds are not always required when getting a mortgage loan. Often it will depend on the amount of risk a borrower presents. For instance, if you have a low credit score, high debt-to-income ratio, or have a high loan-to-value ratio your lender may require cash reserves equal to 2-6 months’ worth of mortgage payments.

  • Conventional Loans – 0-6 months’ worth of reserves dependent on a borrower’s debt-to-income ratio, credit score, and down payment amount.
  • FHA Loans (Federal Housing Administration) – No cash reserves required unless you are buying a 2-4 unit property with an FHA loan.
  • VA Loans (U.S. Department of Veteran Affairs)VA loans in most cases do not require reserve funds unless you are buying a property with 2-4 units.
  • USDA Loans (U.S. Department of Agriculture) – No reserve funds needed regardless of the loan amount.


Reserve Funds for Condominiums or HOAs

Condominiums and HOA’s use reserve funds for maintenance and renovations, or any large emergency expenses that occur. Operating funds that fund the day-to-day operation of HOA’s and condos or reoccurring costs, like taxes, insurance, and utilities.