What Are Cash Reserves and Why is it Important When Buying a Home?

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The money you spend on buying a home is probably the single largest purchase you’ll ever make as a consumer, and you’ll probably need more cash than you anticipate. Not only do you need to save for a down payment and closing costs, but in most cases, you’ll need several months’ worth of mortgage payments set aside in cash. Mortgage companies call these uncommitted and readily available funds “cash reserves.” Think of it as a rainy day savings account that shows that you’re prepared for any issue that may arise. Plan for the unexpected.

Why are Cash Reserves Important?

There are many reasons that cash reserves are required when purchasing a home. Some of these reasons include:

  • Lenders want to know that you can keep paying your mortgage even if you lose your job or some other unexpected expense comes up
  • Lenders want to minimize their risk of you defaulting on the loan
  • The amount of cash reserves you have could impact the interest rate on your mortgage

How Much Do You Need in Cash Reserves to Buy a Home?

While there are sometimes no strict requirements, there are some general guidelines to follow. Homebuyers using a conventional mortgage are encouraged to have at least two months’ worth of mortgage payments in cash reserves. There is no cash reserve requirement for FHA loans. However, individual lenders might still want to see some reserve funds. The bigger cushion you have, the safer you’ll feel, and the better you’ll appear to a potential lender.

Cash Reserves for an Investment Property

If you’re purchasing an investment property, you’ll probably be required to prove to your lender that you have ample reserves on standby in the event your rental income diminishes. It would be best if you were prepared to have at least six months’ worth of cash reserves set aside when you apply for a loan to finance (or refinance) your investment property. In some cases, if you have a low credit score, a higher down payment and more cash reserves may be required. It depends on the specific lender so talk to a loan officer today.

Sett Aside as Much Money as You Can Now

Regardless of what the lender requires in cash reserves, it would help if you made a practice of setting aside as much money as you can whenever you can. You shouldn’t completely drain your savings to become a homeowner. That could be dangerous. What if you have an emergency, like a severe accident, or lose your job? There are many expenses left to consider after you leave the closing table and receive the keys to your new home. That’s why it’s vital to have a sizeable amount of funds stashed away in your savings. You wouldn’t want to face a financial burden because of a failure to plan ahead on your part, so start setting funds aside now.

Note: Opinions expressed are solely my own and do not express the views of my employer