Are Reserves Required When You Purchase a Home?

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Are Reserves Required When You Purchase a Home?

When purchasing a home, how much money do you need? It’s actually more than just the sale price. Before you make an offer on a new home, be sure you are clear on what is required financially, especially in terms of reserve funds.

Buying a home generally requires a down payment. The percentage you put down on the loan can vary depending on the loan program, but it can be as little as three percent or as high as twenty percent. There are also closing costs, which include third-party fees, appraisal fees, taxes, title insurance, and more. In total, those usually average approximately three to five percent of your loan amount. On top of closing costs, you will also need financial reserves.

What are Mortgage Reserves?

Mortgage reserves are savings funds that will remain in your savings account even after you close on your home purchase. They are emergency funds. That means if you lose your job or have some other type of significant unexpected expense after you buy your home, you will still be able to afford your mortgage.

How Does a Mortgage Reserve Work?

Requirements for reserve funds vary drastically from one lender to the next. Some lenders may require only a few months of mortgage reserves, while others ask the borrower to provide a year’s worth of reserve funds. You may be wondering what qualifies as an acceptable source of reserve funds. This is a shortlist of potential sources:

Checking or savings accounts

Trust accounts

Money that is vested in a 401k, IRA, or other retirement savings account

The cash value of a vested life insurance policy

Stock or bond investments

Certificates of deposit (CDs)

Seasoning Your Reserve Funds

Banks and mortgage lenders will ask for a minimum of two months of bank statements during the loan application and review process. That’s why your funds must be “seasoned.” Seasoned funds are funds that have been in your bank account for a minimum of 60 days. This might be paychecks or other deposited money that is held in reserve and not spent on bills or anything else.

Be careful not to spend more money than usual during the 60 days before closing. Your lender will scrutinize your accounts to make sure you can cover the down payment, closing costs, and have the reserves needed if you lose your job after the mortgage closes. Don’t make a random, large deposit either, even if the funds are a gift. It may create alarm to your underwriter and could result in having to provide a letter of explanation or even mortgage denial.

Buying a home might seem like a lot of hassle, but it’s all worth it when you receive the keys to your new home. Homeownership is a worthwhile investment that helps you build security and wealth in the years ahead. If you have questions about the home lending process, don’t hesitate to call us. Primary Residential Mortgage is always happy to help.