Assets and Reserve Requirements

assets mortgage

When applying for a mortgage, a mortgage broker or lender 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 come up with a down payment, pay closing costs, and make monthly mortgage payments going forward once you close your loan.

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.

Season Assets Two Months Before You Apply for a Mortgage!

Many prospective homeowners and those looking to refinance make mistakes when handling their assets prior to a mortgage transaction.

They may falsely assume they can just shuffle some assets from a friend or family member’s account into their own bank account without incident, then use them to qualify for a mortgage.

Unfortunately, this doesn’t fly with many banks and mortgage lenders because the money isn’t properly sourced or seasoned.

Banks and lenders want to ensure the money is truly the borrower’s money, and in the borrower’s account for several months before they’ll accept those assets as their own. If it just appears out of thin air one day, the lender won’t feel very comfortable about the legitimacy of those funds.

For example, attempting to use mattress money for your down payment likely won’t go over well. You might think, why not!? It’s my money, my hard-earned cash, why can’t I use it?

Well, the lender doesn’t know where that money came from if it just appeared in your bank account a couple days ago. Could you have taken out an undisclosed loan, borrowed money from someone, or acquired funds another way that could make you a riskier borrower than you appear? Sure and absolutely.

This is why mortgage lenders typically want to see that any assets used in the mortgage transaction are seasoned for at least 60 days. Put simply, this means providing two months of bank statements that show the funds being present in the account for that entire duration.

Why 60 days? Well, lenders will generally ask for the two most recent bank statements, which cover a span of 60 days, give or take. So anything that occurs prior to those two months of bank statements won’t be revealed to the lender.

For example, if you plan on using a specific bank account to verify your assets, you may want to move any necessary funds into that account 60-90 days before you apply for a mortgage. That way the money will be considered seasoned and the average daily balance of the account will be reflected as well.

The two most recent bank statements won’t show those funds transfers if they were completed 60+ days earlier, in a prior statement period.

And if the funds have been in the account for 60+ days, you shouldn’t need to source them beyond the bank account they’re in.

Conversely, if you move a sum of money into a bank account less than 60 days before you apply, the lender will see that deposit on the bank statement and likely scrutinize it. And more importantly, ask for the source of those funds. If you don’t have a good answer, your loan application could be in jeopardy.

This is why seasoning assets is so important. Once they’re seasoned in a verifiable account, they are considered sourced and should be accepted without further review.

Ultimately, lenders want to verify that the borrower has established a savings pattern, and that the assets are sufficient to support the mortgage payment. Or in the case of anything less than full doc, support the stated income.

They ask that they be seasoned so the borrower doesn’t falsely inflate their financial position to obtain a lower mortgage rate, or to borrow more than they can truly afford.

Asset Reserve Requirements for a Mortgage

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 homeowners 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. In some cases you might not need any though!

– 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 (mattress money)
  • Sweat equity
  • Unsecured borrower funds
  • Illegally obtained funds

Some useful tips regarding using assets for a mortgage:

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

– Try to limit any activity (deposits, withdrawals, purchases, transfers) in said account(s) for the preceding months leading up to the mortgage application to avoid any unnecessary conditions or letters of explanation.

– Even if the mortgage company initially asks for bank statements, ask if a VOD will suffice. A Verification of Deposit (VOD) from your bank provides the overall balance of your account and your average balance based on the past two months. This may be better than providing bank statements, which could show payroll and other information that you may not want to disclose.

– 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.

– Generally you can use money from a joint account for reserves and down payment, but you’ll typically need to provide a letter from the other account holders explaining that you have full access to the funds.

– If you have any recent large deposits (usually defined as one that exceeds 50% of total monthly income) in your accounts, they may be scrutinized and/or unavailable for underwriting purposes depending upon their size.

Tip: At the end of the day, make sure assets are in personal accounts and seasoned long before applying for a mortgage! It makes life easier for everyone.



174 Comments

  1. Ziegan4 July 19, 2017 at 11:02 pm - Reply

    I have a conditional approval for an FHA mortgage loan. I deposited cash in my account that the underwriters are requesting a paper trail for. This money was from repayment of a personal loan that I gave to my boyfriend in 2014. Any advice on how to handle this situation? Thanks in advance!

  2. Timeka June 28, 2017 at 8:23 pm - Reply

    Hi Colin im in the process of closing in a few days and my lender requested 2 months of reserves which is in my bank and the underwriters approved my loan how long do my money have to sit in the bank before i can use it

    • Colin Robertson June 29, 2017 at 9:01 am - Reply

      Timeka,

      You generally don’t want to touch that reserve money until the loan funds to avoid any extra conditions or scrutiny.

  3. Brad June 25, 2017 at 8:28 am - Reply

    My wife and I are looking to build a house on two acres we own. We have recently paid completely out of debt(vehicles and credit cards), and have 50k or so in a 401k and 10k in other dividend reinvesting stocks. We are starting to funnel cash into checking account now that debt is paid off. We are both under 30 years old and both have 800 credit scores, yet we are nervous about going to the bank to start the process of getting a mortgage to build a house. Should we be? Would our land or 401k/ stock accounts offset our lower cash in accounts?

    • Colin Robertson June 25, 2017 at 10:30 am - Reply

      Brad,

      You may want to look into construction financing and/or construction-to-perm financing to determine how much cash you’ll actually need for down payment and reserves. You won’t be nervous if you prepare and know exactly what you’ll need to get approved ahead of time.

  4. Lou March 27, 2017 at 12:40 pm - Reply

    Colin, given that the reserves are in question, is FHA a better way to go? I know there are upfront costs plus M&I.

    • Colin Robertson March 27, 2017 at 12:52 pm - Reply

      Lou,

      You may want to determine what types of loans you can qualify for and see if reserves are going to be an issue for sure, then compare costs…FHA forces mortgage insurance on its borrowers, whereas you might not need it with conventional financing.

  5. Lou March 27, 2017 at 8:02 am - Reply

    Colin, when doing a cash out refinance, do you need to have enough PTI for all existing properties or just for the one you are refinancing?

    • Colin Robertson March 27, 2017 at 9:02 am - Reply

      Lou,

      If you have other financed properties, you will likely need to have X months of reserves for each or they may require a percentage (2-6%) of the aggregate unpaid principal balance of those properties.

  6. Aaron March 22, 2017 at 5:15 pm - Reply

    Colin,

    I am interested in purchasing a single family home as an investment property. I currently do not have the 20% for the down payment buy I have excellent credit and I am interested in using a personal loan for the down payment. I understand that you cannot use borrowed money for a down payment on an investment property, but I was wondering what if you took out the loan for a “vacation” or something else, let it sit for 6-12 months or so, and use it for the 20% down payment. I understand this will affect my debt to income ratio, but as long as the numbers work will I be okay? From my understanding the underwriter only wants 2-3 months of bank statements and the balance prior to that isn’t in question. Or does the mortgage underwriter go back and see that some of my down payment may have come from that personal loan? Any advice would be greatly appreciated, thank you.

  7. Kelly March 4, 2017 at 3:18 pm - Reply

    Hi, we are in the process of purchasing a house and are planning to use a 401K loan for the down payment (FHA loan). We are planning to take out the maximum amount allowed and should have some money left from the 401K that we would like to use for the appraisal. My question is – if using a 401K loan, does it matter when we transfer the funds into our checking account? I’ve read about funds being seasoned, but so far all the money is still sitting in the 401K. Can we transfer at any time as long as we provide proof that the funds came from the 401K? Or do we have to wait until closer to closing to transfer funds into checking?

    • Colin Robertson March 5, 2017 at 10:52 am - Reply

      Kelly,

      The 401k loan should be considered seasoned regardless of when it’s transferred to your checking, but the lender will need to see the paper trail to ensure those funds actually arrived via the 401k loan and not an unacceptable source. It doesn’t hurt to run this process by your lender to avoid any hiccups.

  8. Matt Malec February 10, 2017 at 1:01 pm - Reply

    Hi Colin,

    If someone is putting 20% down on their primary residence on a conventional loan, how much of it must be their own funds and how much can be a gift?

    • Colin Robertson February 15, 2017 at 3:25 pm - Reply

      Matt,

      In many cases it can all be in the form of a gift if 80% LTV (20% down) and a one-unit owner-occupied property.

  9. Hannah December 12, 2016 at 6:23 pm - Reply

    Why is it that I can have over $150,000 and fair credit but cannot secure a mortgage? I received a personal injury settlement that is handled by a financial advisor and he sends me the amount I need to live on monthly and I can call and let him know when it’s time to pay tuition or if I had to go the emergency room, etc. This past summer I was told it was credit problems. I fixed the credit problems and now I am being told that my monthly disbursement isn’t income and that unless I put half of my money into an annuity I don’t meet the FHA requirements, and that I cannot qualify for a USDA loan because of the fact I have so much money. I am so tired of renting and throwing away my money but it is also a very stupid financial decision to pay for a house in cash when I make a decent return on my financial portfolio. Please, tell me how I can purchase a home. I even have the house I want to buy and have discussed it with the owners. I just need a mortgage.

    • Colin Robertson December 13, 2016 at 10:38 am - Reply

      Hannah,

      It sounds like you have sufficient assets, but an income shortfall? Might be able to qualify using assets where they take the total and divide over 360 months (mortgage term). Both Fannie and Freddie offer something like this, but you’ll probably want to work on your credit as well to be a strong candidate.

  10. Ruth December 12, 2016 at 3:57 pm - Reply

    Hi Colin,
    Do you think there is any possibility of me qualify for a home loan?
    I would like to purchase a $90,000 condo/coop. I work par-time making $16,000/yr. I have 25 thousand in savings. I have no debt or credit cards, but my credit score is below 600.

    If I were elegible, how long do you think it would take me to move into a new home if I started the process today?

    Thanks for being so attentive and helpful to all your web page visitors.

    • Colin Robertson December 13, 2016 at 10:34 am - Reply

      Hi Ruth,

      You’d probably want to get your credit score up a lot higher first to ensure you get the lowest rate and qualify for conforming programs that require 620 minimum scores. The part-time work would need to be ongoing with history so the lender knows you’ll continue to receive it. And you’ll need to clear enough to keep your DTI at/below the maximum once your total housing payment is factored in. May want to speak with lenders/brokers to run a quick pre-qual to see if it’s a possibility, within reach, or nowhere close.

  11. patrick October 19, 2016 at 2:38 am - Reply

    why does my mortgage company need information about my pension. I do not have a pension loan out or am I using any money from my pension towards my potential house

    • Colin Robertson October 19, 2016 at 8:07 am - Reply

      Patrick,

      They might be asking for all your asset documentation and assuming you have a pension/401k/etc. If you don’t have one there won’t be any related documentation.

  12. Moe October 1, 2016 at 3:32 am - Reply

    Hi,

    I was originally asked to have one month’s rent in reserve for my mortgage. But now I am asked to have 3 months. I have an ESOP profit sharing account with my employer which I cannot withdraw funds from until I either leave the company or retire. Would I be able to use the amount in the ESOP profit sharing account for my reserve requirementS?

    • Colin Robertson October 3, 2016 at 1:48 pm - Reply

      Moe,

      You’ll have to run it by your loan officer and/or underwriter to be sure…

  13. Joleen September 10, 2016 at 5:18 am - Reply

    About 2 years ago My Fiance of 6 years, (now my EX-FIANCE) and his Loan Officer conned me into lending his Parents the money for his down-payment, as a “GIFT” from them ($10k). This money was VERBALLY AGREED UPON, by my Fiance and his Parents, that the monies I lent them, was a LOAN and NOT a GIFT. We weren’t to be married until a year after Settlement, and I would not have any Equity nor be on the title to the house until we were married. I asked about just adding me to the title at Settlement and I was told by the Loan Officer that it was not a good idea to do so. I was extremely wary of this whole transaction, and about 3 days before Settlement (by MUCH prodding from my Fiance and his Loan Officer), I FINALLY told my Bank to wire the money to my Fiance’s parents. Approx. 24 hours before my Fiance’s Settlement, I was then told by my Fiance that he nor his Parents could pay me back. I flipped. Then he tells me that the Loan Officer told him that he could put me on the title to the house, within 3-6 months after the Loan closed so I wouldn’t be so worried. I was upset, but I couldn’t dispute the Wire Transfer with my Bank, in time….to have them reverse it, and to STOP Settlement. I bit the bullet, held my breathe and KNEW I made a horrible mistake. These people committed Mortgage Fraud, and conned me out of my money, to help my Fiance get a Mortgage with MY MONEY. The Loan Officer even went so far, as to CHANGE the RECEIPT on the Home Inspection that I paid for, to make it look like my Fiance PAID for it. Subsequently, after a year…..I FINALLY got tired of fighting with my Fiance about putting me on the title to the House, or paying me back the money (like he said he would do). I have since, broken up with him….over this, which is to be expected. We live in Pennsylvania, and an ORAL/VERBAL AGREEMENT has a Statute of Limitations of 4 years. It has only been 2 years since he defrauded me, so I have the ability to seek Counsel. I was told that I have every right to contact the Bank, and tell them what my EX-FIANCE and his Loan Officer did to obtain the Mortgage. I will also be filing a Civil Law Suit. Any ideas as to the ramifications to my EX and the Loan Officer and possibly the Bank, for perpetrating this Fraud…? And, Yes, I have ALL the documentation to confirm what they did, and much much more.

    • Colin Robertson September 12, 2016 at 5:18 pm - Reply

      Joleen,

      Not sure what will happen to them, sorry to hear that happened to you.

  14. James August 24, 2016 at 6:45 pm - Reply

    Hi,

    We are in the process of starting the final loan approval as we are 2 1/2 months out from closing (new construction). We have a FHA loan with 3.5 down and has already placed the down payment and earnest money into escrow. We have the income to cover the new mortgage payment; however, during the time of construction we were planning to save the remaining cash to close amount. We are exactly 3 weeks from obtaining the cash (5K). Since we are 2 months out from closing date, think it is possible the lender wants to see the reserve money now or will wait until it is all there.

    • Colin Robertson August 25, 2016 at 4:52 pm - Reply

      James,

      If you want the definitive answer you should probably ask the lender directly. The source of that cash may also be scrutinized.

  15. Maureen August 2, 2016 at 4:01 pm - Reply

    Hi. I’m planning to retire in 2.5 years, sell my current home owned outright and purchase a home in another state. I expect to need some amount of mortgage in addition to the approx. 100k from the sale of current home. Will I be able to get a mortgage based on social security, personal annuity, and IRA distributions? Will they accept those as income at that point? I’ve been advised they won’t and I’ll need to get mortgage and buy home prior to leaving ft work. Thanks so much!! M

    • Colin Robertson August 4, 2016 at 11:21 am - Reply

      Maureen,

      It might be possible to use assets to qualify for a mortgage (assuming they are plentiful/sufficient), but it might be easier to secure all mortgages before retirement.

  16. John June 21, 2016 at 7:00 pm - Reply

    Hello Colin

    I’m planing to purchase a second apartment , I own a business I have 100K in my business account I like to use that for the down payment which is around 55k I don’t have enough money in my personal account for the down payment I only take out what I need to pay my living expenses, so I need to make a payment to my personal account for the down payment before the purchase is that correct if I wanna use the money from the business, but that money I take out I will need to pay income tax correct? Same as I pay on my monthly salary. Thank you for your advice!!

    • Colin Robertson June 24, 2016 at 4:18 pm - Reply

      John,

      Can’t comment on the tax implications, but you should make sure the business assets can be used for the mortgage. Might have to prove that either you have full access to the funds and that their removal won’t affect the business negatively.

  17. B.. June 7, 2016 at 5:52 pm - Reply

    Hi Colin,
    I’m in the middle of the mortgage process with one of the nations largest lenders and am trying to purchase my dream home (for a wonderful price and as a new primary residence) before selling my current home. (Trying to capture this house before it’s gone and have plan to do minor renovations aka have wallpaper removed, rooms repainted, install carpets in order to put current house on market for late summer/fall – and I can carry both properties for up to a year if I had to without damaging myself financially)

    This is a jumbo/non-conforming loan program with 10.1% down and no PMI. Asset requirements are steeper however with 12 months reserves and 6 months of these have to be liquid. I planned to take a 401k loan to help subsidize closing costs and meet the liquid asset requirements at closing and at the outset I asked the originator specifically if the 401k loan would be counted toward DTI and was told no. Here I am over $1,200 deep in inspections and the loan processor u was handed off to informs me that the 401k loan is indeed going to count towards DTI and that puts me in the 37% range and the hard cutoff is 35%. I think I feel the dream home slipping away. I understand this isn’t a normal conforming loan, but this feels rather bait-and-switch… I’d appreciate any background info on how this might happen and also any advice you may have. Thank you.

    • Colin Robertson June 9, 2016 at 9:57 am - Reply

      B,

      If it is indeed counted and the DTI is exceeded, you could ask for an exception or play around with the numbers (down payment, etc.) to get the DTI back into range.

  18. Lisa May 31, 2016 at 11:25 am - Reply

    Hi, I’m buying my first home and will be using a rollover IRA to cover my closing costs. Funds are from my previous employer’s 401k and have been in the IRA account about a year and half. My question is should I move the funds to my personal checking/savings account now or transfer the finds right before the closing date in mid-July? I’m still confirming a lender and may check one or two more to compare rates/fees.

    • Colin Robertson June 1, 2016 at 8:21 am - Reply

      Lisa,

      Probably best to ask your lender when you should move the money to ensure it runs smoothly.

  19. Mae Francis May 18, 2016 at 2:22 pm - Reply

    Hi Collin,

    My husband borrowed from his 401k to use as a down payment for a home purchase which we received and deposited into his checking account. The purchase fell through because of a problem with that specific house and we had to cancelled the purchase contract. We will now be looking for another property to purchase. Do we need to let his 401 company know what happened, or just move forward with looking for something else to buy, since they previously requested copies of the purchase contract of that first home that we ended up not buying. Also, what if we need to now borrow more money from the 401k? Will they then ask about what happened to the first purchase? We just want to do what’s right.

    • Colin Robertson May 23, 2016 at 8:49 am - Reply

      Mae,

      If they needed a purchase contract for that specific address, they’ll likely need one for the new property. There may also be a time limit to apply the funds to a home purchase, which you may want to discuss with the 401k company to ensure you complete everything in time.

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