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!


13 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.

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