Assets and Reserve Requirements

When applying for a mortgage, a mortgage broker or bank will likely inquire about your assets, and more specifically, your liquid assets. They’ll want to know what you’ve squirreled away in order to provide a down payment, pay closing costs, and make monthly mortgage payments going forward.

So unless you’re relying on a documentation type that doesn’t require the verification of assets, it’s very important to make sure you’ve got plenty of assets in your personal accounts. Not only that, but those assets will be need to be seasoned for at least two months in most cases.

Many prospective homeowners make mistakes when handling their assets prior to a mortgage transaction, thinking they can shuffle some assets from a friend or family’s account into their own without incident. Unfortunately, this doesn’t fly with many banks and mortgage lenders because the money isn’t sourced or seasoned. Banks and lenders will want to ensure the money is in the borrower’s account, and that it’s been there for several months before they’ll accept those assets.

They do so to verify that the borrower has established a savings pattern, and that the assets support the stated income (if applicable). They ask that it be seasoned so the borrower doesn’t just borrow money to falsely inflate their overall financial position for the sake of securing a lower mortgage rate.

Asset Reserve Requirements

If you get your hands on a rate sheet, or talk to a bank or mortgage broker, they’ll usually tell you how many months of reserves you’ll need to verify assets and qualify for a mortgage.

Asset requirements will be defined in terms of PITI (Principal Interest Taxes and Insurance), meaning you’ll need enough money to pay for “X” amount of months of mortgage payments including principal, interest, taxes and insurance.  And mortgage insurance, where applicable.

Reserve requirements will vary from bank to bank, and from mortgage program to mortgage program, but you can get a good idea of what you may need to provide for different property types.

- Owner-occupied residences typically require two months PITI in reserves, but may ask for up to six months.

- For second homes, reserves can range between three to four months, but again, can be higher.

- On non-owner occupied properties, otherwise known as investment properties, reserves are usually six months PITI or more.

Reserves Needed for Specific Types of Loans

For Fannie Mae and Freddie Mac loans (conforming), reserve requirements vary based on credit score and LTV, along with property type.  They can range from as little as zero months to as much as 12 months, depending on the scenario.  As a rule of thumb, more risk requires more reserves.

There is no reserve requirement for FHA loans on 1-2 unit properties. However, 3-4 unit properties typically require three months of PITI.

For VA loans, there isn’t a reserve requirement unless it’s a 3-4 unit property, at which point six months reserves are required.  Additionally, three months of reserves are required for each rental property owned that is not secured by a VA loan.

For jumbo loans, reserve requirements can vary tremendously, from as little as six months to several years, depending on how large the loan is.

Allowable types of assets:

  • Earnest Money Deposit
  • Checking/Savings/CD/Money Market Accounts
  • VOD
  • Business accounts
  • Stocks
  • Bonds
  • IRA/401k and other retirement accounts
  • Gift Funds/Gift of Equity
  • Sale of Assets
  • Seller contributions

Ineligible types of assets:

  • Cash on hand
  • Undocumented funds
  • Sweat equity
  • Unsecured borrower funds
  • Illegally obtained funds

Some useful tips regarding using assets for a mortgage:

- Move money into a savings account the minute you start looking for a property. This will allow those funds to be seasoned, and thus won’t require sourcing.

- Get a VOD, or Verification of Deposit from your local bank that provides the overall balance of your account, and your average balance based on two months. This is better than providing bank statements, which may show payroll and other information that you may not want to disclose.  Even if the mortgage company initially asks for bank statements, a VOD should suffice.

- You may also use retirement accounts, but lenders typically only consider 70% of the total, so factor that in to ensure you have enough to cover reserves. *This can vary based on your individual lender’s guidelines.

- If you plan on using business accounts for assets, you’ll likely need to be the 100% owner. Although if you own only 50%, some lenders will accept a CPA letter stating what percentage the borrower has access to, and that the use of those funds won’t affect the business negatively.

- If you sell personal assets, make sure you save receipts to prove the source of funds. Acceptable items usually include automobiles, coins, art, and antiques.

Tip: Make sure assets are in personal accounts and seasoned long before applying for a mortgage!


35 Comments

  1. Jeremiah July 18, 2013 at 12:04 pm -

    I learned the hard way that depositing a ton of money into a personal account at the last minute doesn’t suffice. It needs to be seasoned for at least two months and if it’s a substantial amount, the lender is going to want to know the source of the funds. In other words, you need to shore up assets long before applying for a mortgage to avoid any scrutiny.

  2. Amelie July 20, 2013 at 5:56 am -

    You should also tell readers that jumbo loans typically require six months of PITI or more, seeing that they are larger loans and carry more risk.

  3. Stuart July 21, 2013 at 5:27 pm -

    Most portfolio loans (loans kept by the bank and not sold to Fannie/Freddie) require more than two months of PITI for asset verification. After all, they’re keeping the loans, so they actually want to know you’ll be able to pay back the loan if you lose your job.

  4. Lakesha August 15, 2013 at 8:27 am -

    This is one part of the mortgage process you don’t want to screw up. Put the money in an account and don’t mess with it. If you move anything or deposit a large amount during or right before the underwriting process, you’ll deal with a ton of red tape. Season those assets!

  5. Jane September 14, 2013 at 11:25 am -

    My lender wants me to have 6 months of reserve as I am buying a investment property. My daughter is loaning me the money to fund it and she wants her money back after closing. How long do I have to leave it in reserve after closing?

  6. Colin Robertson September 14, 2013 at 11:47 am -

    Once a loan funds and records, you can do what you want with the money, but gift letters specify that the money does not need to be paid back to the person who gave you the gift. And make sure the bank is okay with you using gift funds for reserves.

  7. Jane September 14, 2013 at 12:24 pm -

    Aprox. how long do I have to keep her money in my account before I apply for a loan? Thanks

  8. Colin Robertson September 14, 2013 at 1:32 pm -

    If you don’t want to use gift funds, your assets must be seasoned. Typically, banks will ask for your two most recent monthly bank statements for asset verification. Any sizable deposits that show up on these statements will be scrutinized by the lender, which is why it’s important to deposit money needed for reserves and/or down payment at least two months prior to applying for a mortgage. This way the deposit won’t be included in the bank statements you submit to the lender, which will make the funds seasoned.

  9. Steve November 12, 2013 at 10:58 am -

    Congratulations Jane, you’ve just admitted to bank fraud, in that you’re representing to the bank/lender that you have x amount of dollars in seasoned assets that you “OWN”, when in fact it’s only money your daughter is lending you to shore up this false asset account. It’s crap like this put the market where it is today!

  10. E. Briscoe January 15, 2014 at 1:43 pm -

    What are the asset requirements for an FHA loan?

  11. Colin Robertson January 16, 2014 at 2:02 pm -

    For FHA loans, you don’t need to provide asset reserves if it’s a 1-2 unit property. However, 3-4 unit properties typically require 3 months of PITI for reserves.

  12. Sierra February 26, 2014 at 11:02 pm -

    I’m applying for a mortgage on a $1,820,000 house; mortgage amount will be about $1,450,000. The lender says they require 18 months reserves. This seems quite high.
    Is it uncommon?

  13. Colin Robertson February 27, 2014 at 10:42 am -

    Sierra,

    It’s not uncommon when it’s a super jumbo loan amount, aka over $1 million, nearly $1.5 million. Put simply, the lender wants to know you can actually make payments for a while on such a large loan.

  14. Karin Worthey April 29, 2014 at 12:13 pm -

    I’m applying for a refi of $300k on my primary residence that was appraised at $480K. I have no liabilities. I own 2 other homes free and clear. My credit score is 820. I have over a million in stocks, CD’s, etc., going back many years. I have a 25 year employment history with the same employer. WHY IS THE LENDER TREATING ME LIKE A CRIMINAL? What regulations have I failed to meet?

    Thank you.
    K

  15. Colin Robertson April 29, 2014 at 12:56 pm -

    Karin,

    What are they asking for? What’s the problem?

  16. Cris May 21, 2014 at 6:51 am -

    Can I borrow money from my 401K to use for down payment for purchase of land if I don’t have the funds in bank account and list the 401K as an asset?

  17. Colin Robertson May 21, 2014 at 10:15 am -

    You might be able to borrow against the 401k to get the necessary funds, but the 401k loan payment may need to be factored into your DTI.

  18. Laurie May 22, 2014 at 11:07 pm -

    I have just been asked by my lender to supply six months reserve for an fha loan a week before closing, he is asking me to get a 12000.00 gift loan from my parents with documentation and then he says when we close I can give it back to them. I told him my parents don’t have 12,000.00 (originally he told me all we would need to close is 3900.00, he;s using the credit score as the excuse, it’s the same as when he pre approved us), anyway now he is asking if we will borrow it from him personally and then after closing we will pay him back. Does this sound fishy to you??

  19. Colin Robertson May 23, 2014 at 8:07 am -

    It’s possible that you would need a larger down payment (10% vs. 3.5%) if you credit score turned out to be below 580. Do those numbers add up in that respect? Gifts are normal, he probably assumed your parents had $12,000 to give you since they were originally on-board with $3,900…

  20. Brian May 24, 2014 at 3:38 pm -

    We have been pre approved for a $750k mortgage. We are planning on using a 80/10/10 mortgage. We have $30k in savings, $25k bonus added in two weeks and pulling $35k from an IRA to put towards down payment. We have over $200k in reserves, credit score of 775-780 and ann inc of $350k. Will taking money out of the IRA hurt our chances of qualifying for the loan?

  21. don anderson May 24, 2014 at 10:32 pm -

    my wife passed away unexpectedly recently, mortgage was in her name only (we never got round to adding my name) I have NOT contacted mortgage co. yet to her passing, my fear is they’ll insist on a new loan in my name rather than just taking over existing loan. I only work part time, so I’m income poor but I have assets (stocks, bonds, mutual funds ) over 200K current loan amount due is 140K. any advice? and any chance of qualifing for a loan with the amounts i supplied? thanks.

  22. Colin Robertson May 25, 2014 at 4:50 pm -

    Brian,

    Why are you pulling money from your IRA if you have over $200k in available assets?

  23. Colin Robertson May 25, 2014 at 5:32 pm -

    Don,

    Sorry for your loss. This is a pretty complex situation with a lot of variables, so speaking with a lawyer/estate planner might be advisable. It sounds like you’d have trouble qualifying for a new loan on your own, so a refinance might be tough, though it could be worth exploring if the current rate is significantly higher than today’s rates. With regard to the current loan, the Garn-St. Germain Act may provide you with some rights to continue making payments.

  24. Brian May 25, 2014 at 7:24 pm -

    Most of it is qualified money and stock options. Does that hurt our chances of qualifying?

  25. Colin Robertson May 26, 2014 at 9:06 am -

    Brian,

    As long as the source of the assets is acceptable, it shouldn’t affect qualifying. You mentioned that the bank already pre-approved you, so I’m assuming they already know where the money is coming from and are okay with it. Just make sure they fully understand your asset situation and also time everything properly to avoid delays as shuffling money can be time consuming.

  26. Caro June 2, 2014 at 11:46 am -

    My husband is applying for a mortgage and I am not included on the application because I am a full-time PhD student (to be done later this year) and have no job at the moment. He is close to being denied (at 51.5% instead of the required 50%). I own some valuable artworks and antiques and have a professional appraisal for each one – used for insurance purposes. Can I give or sell my husband these assets to help him get the loan for our house? If not, can he claim my retirement account as an asset without me being on the application? Thank you!

  27. Colin Robertson June 2, 2014 at 4:40 pm -

    Caro,

    You can ask if they’ll consider the antiques and artwork as a compensating factor, or alternatively try to get the DTI lower by buying down the interest rate and/or get a gift to lower the loan amount. Your loan rep should be discussing ways to rework the loan to make it eligible.

  28. Arvind June 17, 2014 at 8:32 pm -

    My closing is on June 19 and today on June 17th the mortgage broker said that the mortgage insurance is asking for seven months reserve of $24000

    So i sent him my 401k statement which has $29k. Do you think that should be fine?(FYI, I also took a loan from my 401k for the amount of 20k for making down payment, so the available 29k is after the loan amount)

    Also why is mortgage insurance asking me for seven months reserve, while the lender bank already said its clear to close.

    As per the broker he said once the mortgage insurance reviews your seven months reserve evidence then they should be able to provide me with a HUD statement.

    Now I just have one day left to close, should that be fine, for things to sort out?

  29. Colin Robertson June 17, 2014 at 9:34 pm -

    Arvind,

    The mortgage insurer has its own underwriting guidelines. Retirement assets may be discounted to account for market volatility and early withdrawal penalties, so I don’t know if you will have a sufficient amount of reserves. You should be speaking with your broker regarding this matter to ensure you have enough funds to close. He or she should know.

  30. Debra June 26, 2014 at 8:06 pm -

    My husband and I applied for an fha loan the underwriter is requiring a 3 month reserve is this okay and why

  31. Colin Robertson June 27, 2014 at 9:38 am -

    They wouldn’t be asking for it just for the sake of asking, so it’s probably “okay.” Maybe it’s a 3-4 unit property? Or a compensating factor for a high DTI ratio. Ask them why!

  32. Maxi August 14, 2014 at 10:54 pm -

    I have conventional loan and an investment property( 2 units) which has >30% equity . initial request was 6 months reserves on investment only . I presented all that was requested., now they came back from underwriting ,they are requesting 12 months reserves on both investment and purchase. I am putting down 20% ,credit score is 729. I also have all liquid assets they are requiring she is also requesting I verify 10,000 that has been in account since 5/09/14 which is 3 months ago which I received from a tax return ..Are there guidelines that are in place stating that with Freddie and Fannie loans if there is more than 30% equity that you shouldn’t need more than 6 months reserves ? My closing date has come and gone and I feel as if I am being jerked around .what is your take on this?

  33. Colin Robertson August 15, 2014 at 9:58 am -

    Maxi,

    The required reserves can depend on the bank and the loan program and what the underwriter discovered when looking at your loan file. It sounds like you have the money and they’re in the process of reviewing some of the funds. If your principal residence is pending sale or converting to a second home/investment property, there could be additional required reserves, which is based on whether the current principal residence has 30% equity or not, but that doesn’t sound applicable to your situation.

  34. Hope August 19, 2014 at 2:26 pm -

    We have a loan for a 1Mil. They are asking for a 12 month reserve. We have a lot in stocks, they are asking us to have Cash in Bank. Do we really need to extinguish our stock to show we have money on reserve, or should the stock be enough?

  35. Colin Robertson August 19, 2014 at 5:23 pm -

    Hope,

    Stocks are considered liquid financial assets, but the particular jumbo lender you’re working with might want to know you’ve actually got some cash savings in the bank as well seeing that they’re giving you a $1 million loan. If you’ve only got investments and no or minimal savings, the underwriter might be hesitant. However, you shouldn’t have to sell your stock…ask them what works and go from there.

Leave A Response