Will You Need Money in Reserve to Get Approved for a Mortgage?

Getting approved for a mortgage can be a long and complicated process. You'll need to shop around for a home loan, submit an application, and provide a ton of financial documentation to your lender. Your lender will then consider things like your income and credit score to decide how much you can borrow and what rate to charge you.

Your lender may also want to see that you have financial reserves before it approves you for a loan. But what exactly does this mean, and will this be a requirement in your situation? Here's what you need to know.

What are mortgage reserves?

Mortgage reserves refer to money you will still have left that's available to you after you pay your down payment and closing costs. Lenders may want you to have some money set aside that is easily accessible in case you need it to cover your mortgage costs if you experience a job loss or another decline in income.

Typically, mortgage lenders will require your reserves be in liquid assets, which means the money isn't tied up and you could access it quickly should it become necessary. Examples of assets that could satisfy your reserve requirements include:

• Money in your checking account or your savings accounts
• Certificates of deposit (CDs)
• Money invested in a retirement or brokerage account
• Cash value life insurance policies

The point is, the bank wants to know that if you take out a home loan and then something goes wrong, you aren't going to stop making payments and end up in foreclosure.

Will you need money in reserve?

Reserve requirements can vary based on many factors, including:

• The type of property you are purchasing
• Type of loan you take out
• Lender policy
• Your credit and income
• How much you are borrowing

Your lender will tell you exactly how much you need in reserve. In general, though, you can expect that you may need around:

• Two to six months for a primary residence that you will personally occupy
• Two to four months for a second home
• Six or more months for an investment property

If you are getting a government-backed mortgage loan, such as an FHA, USDA, or VA loan, reserve requirements can also differ. While USDA loans never require reserves and FHA or VA loans don't require reserves for single-family homes, things are different with multi-family properties. If you are buying a three- or four-unit property, your lender may require three months in reserve for an FHA loan or six months for a VA loan.

When lenders calculate reserve requirements, the goal is to make sure you have the funds to cover your principal and interest on your mortgage, as well as taxes and insurance (PITI). So, if your total monthly mortgage payment, including all these costs, is $1,000 and you need two months of reserves, you would need $2,000 set aside in liquid assets after you close and pay all those costs.

It's important to find out early on from your mortgage lender if you will need assets in reserve. This way, you can start saving money to make sure you meet this requirement and are ready with your home purchase.