Why Cash Reserves Are Important
Whether obtaining an FHA Loan or Conventional Loan there are numerous guidelines the lender follows before providing the borrower with loan approval and funding for their purchase or refinance. Many borrowers are inexperienced in the loan process and unfamiliar with the various guidelines. Most people know what a down payment is, but many do not know what cash reserves are or how to determine how much they will need to have in reserve to fulfill this requirement. A good loan officer will know if they are going to take your loan package to a lender with this guideline. Ideally, you will have conferred with the broker you have selected to work with early enough in the process that you will be well prepared and not caught off guard and short of the amount your needed for your loan approval.
Cash reserves are the amount of cash that a borrower is required to have available over and above the funds that are needed for the down payment, closing costs and prepaid expenses. Reserve amounts are generally based on the proposed monthly principle, interest, taxes and insurance payment or PITI, in addition to any assessments. Lenders who enforce a cash reserve requirement guideline to make the loan, do so to ensure that the borrower has the necessary funds available to them to make their monthly mortgage payment should they encounter any kind of unexpected financial difficulty that would otherwise impact their ability to make their monthly loan payment.
What qualifies as cash reserve funds to the lender?
The lender will accept cash in checking or savings accounts or any other liquid or near liquid asset that the borrower would be able to convert to cash quickly. The funds must be easily accessed by the borrower either by withdrawing them from an account, the sale of an asset, redemption of vested funds or getting a loan secured by an asset from a fund administrator or an insurance company.
How Much Is Needed in Cash Reserves?
The number of months of the PITI + assessments payments that the borrower will need to have in in reserve can vary between lenders. Some mortgage lenders will require that at least two months of cash reserves be available. However, typically the amount of reserves is determined by the Fannie Mae and Freddie Mac automated underwriting systems and may vary depending on the overall information pertaining to the mortgage.