What cash reserves underwriting requires

What a reserve is

Reserves are the liquid assets you still have after the down payment and closing costs have been paid — money left in the bank the day after you get the keys. They are not measured in dollars. They are measured in months of housing payment.

The unit is PITIA: principal, interest, taxes, insurance and association dues. The whole monthly housing obligation, not the mortgage portion. So "six months of reserves" means six times that full figure, and on a house with high property taxes or a substantial HOA the number is larger than people expect.

The purpose is straightforward. An underwriter is asking what happens if your income stops in March. A borrower with nothing left after closing has no answer.

How much is required

There is no single number, and anyone who gives you one is describing a single programme. The requirement moves with the loan programme, the occupancy, the property type, the strength of the rest of the file, and — on most conventional loans — whatever the automated underwriting system returns on your specific application. Broadly:

• A conventional purchase of a primary residence by a well-qualified borrower frequently carries no stated reserve requirement at all. That is not the same as reserves not mattering: they are one of the compensating factors that lets a file pass with a higher ratio or a thinner credit profile.
• Second homes and investment properties carry explicit requirements, and investment property is the heaviest of the common cases.
• FHA generally does not require reserves on one- and two-unit purchases, but does require them on three- and four-unit properties.
• VA approaches it differently, applying a residual income test — a required amount of money left over each month after housing, debts, taxes and maintenance, varying by household size and region — rather than a months-of-payment reserve for an ordinary primary residence. Reserves come into it where rental income from a multi-unit property is being used.
• Jumbo and portfolio loans ask for substantially more, sometimes many months, because the lender is keeping the loan rather than selling it.
• Multiple financed properties stack the requirement: reserves are frequently required against the other properties you own as well as the one being bought.

Your loan officer can tell you the exact figure for your file, because it is printed on the automated underwriting findings. Ask for it early, in writing, and ask what it becomes under the scenario you are considering. That request costs nothing and is the only reliable answer.

Which assets count, and at what value

Generally usable, with documentation:

• Checking and savings accounts, money market accounts, certificates of deposit.
• Stocks, bonds and mutual funds held in a taxable brokerage account. Some programmes count the full documented value for reserves; others discount for market movement.
• Vested retirement accounts, counted at a discounted percentage of the vested balance to allow for tax and early withdrawal penalties, and reduced by any outstanding loan against the account. The discount and whether the funds must be withdrawable at all vary by programme.
• The cash value of a life insurance policy, and the proceeds of a documented sale.

Generally not usable:

• Cash on hand. Money that has not been in an account cannot be sourced, and unsourced money is not an asset for these purposes.
• Unsecured borrowed funds. A personal loan taken to manufacture reserves does not work, and it adds a monthly payment to your ratio at the same time.
• Business account funds, unless you can document your access to them and that withdrawing will not damage the business.
• Equity in the property you are buying, and, in many cases, funds that will only exist after a sale that has not yet closed.
• Gift funds, in some programmes and not others — treatment differs, so ask rather than assume.

Expect to document two months of statements on every account, every page, including the blank ones. Any deposit that is large relative to your income has to be explained and evidenced. A gift needs a letter from the donor and usually a trail showing the transfer. Money that appears without an explanation is the most common single cause of a file stalling.

The trap

This is the reason the article exists. The instinct when a ratio is too high is to throw savings at debt. Do that carelessly and you fix one test by failing another.

The lesson is not "never pay off debt". It is that the two tests must be looked at together, which is why the payoff optimiser shows remaining reserves next to each payoff and flags the ones that leave you thin. It is also why the efficient payoff — the one that removes the most monthly payment per dollar of cash — is the one worth finding, since it buys the most ratio for the least damage to your balance.

Order of operations

1. Get pre-approved first, and ask for the ratio and the reserve requirement as separate figures.
2. Ask your loan officer to run the scenario before you pay anything off. The automated system can be run again with the payoff assumed, and the answer takes minutes.
3. Prefer payoffs that remove a large payment for little cash. Small instalment loans usually qualify; large card balances usually do not — see what counts as a minimum payment.
4. Season your accounts. Move money into place at least a couple of months before applying, so it appears on the statements as a settled balance rather than a fresh deposit requiring an explanation.
5. Change nothing after application. No new accounts, no large transfers, no career moves. Underwriting frequently re-checks credit immediately before closing.

And if the reserve requirement is the binding constraint rather than the ratio, the correct response may be to keep the cash, accept a smaller loan, and buy something cheaper. That is a worse answer than the one you wanted and a considerably better one than closing with nothing behind you.