The savings set aside for making future mortgage payments, handling unexpected emergencies, and other finances after closing.
Cash reserves, commonly referred to as simply “reserves,” are considered by lenders as the savings set aside for making future mortgage payments, handling unexpected emergencies, etc.
Documenting reserves on file is helpful in the lender’s risk assessment, as ample reserves historically indicate a lower probability of mortgage default. Some loan programs require anywhere from two to 24 months of reserves on file in order to secure mortgage financing.
The “reserve requirement” is based on the projected monthly payment for the property being purchased and/or the actual monthly payments for properties already owned. Reserves are the documented “excess” funds that will remain in a borrower’s account(s) after the purchase is said and done.
For jumbo financing, different investors have limitations on what accounts (and their percentages) qualify towards meeting the reserve requirement, but overall, the funds must always be held in the borrower’s own name.