Introduction
This guide explains the rules about the money you need to have saved after you buy a home, known as minimum reserve requirements. These rules make sure you have enough saved to cover your mortgage payments for a few months. We’ll cover what counts as these savings, what doesn’t, how you can fill up your savings pot, and how to figure out how much you need.
What Are Liquid Financial Reserves?
Liquid financial reserves are the money you can quickly use after buying a home. This includes cash or things you can easily turn into cash. For example, you might have money in a bank account, or you could sell an asset or redeem vested funds. The important part is that it should be accessible to cover your mortgage payments if needed. The amount of reserves is calculated based on how many months of mortgage payments you can cover with your savings.
Acceptable Sources of Reserves
You can use various assets as reserves, such as money in checking or savings accounts, investments like stocks or bonds, the vested amount in retirement accounts, and the cash value of a life insurance policy. These are all considered liquid because you can quickly turn them into cash.
Unacceptable Sources of Reserves
However, not everything can be counted as reserves. For example, money that’s not vested, which means it’s not yet available for you to use, or funds that you can only access under specific conditions, like retirement or leaving your job, don’t count. Also, stocks in companies that aren’t publicly traded, unvested stock options, personal loans, and credits from selling your home back to the buyer are off the list. Contributions from interested parties or lenders and cash from refinancing your home can’t be considered reserves either.
Supplementing Borrower Funds
You can boost your reserves with money from acceptable sources to meet the reserve requirements. Gifts are okay, but not gifts of equity (which is when someone sells you a home for less than its value as a kind of gift).
Determining Required Minimum Reserves
The exact amount of reserves you need depends on several factors: the type of transaction, whether the property will be your primary home, a second home, or an investment property, the number of units in the property, and how many other properties you own with mortgages. Manual loans have specific guidelines in the Eligibility Matrix, but automated systems will calculate the reserve requirements for you. For example, you might need two months of reserves for a second home or six months for an investment property or if refinancing makes your debt-to-income ratio over 45%.
Calculation of Reserves for Multiple Financed Properties
If you own other properties with mortgages, you’ll need to calculate additional reserves based on the total outstanding mortgage balances. The required percentage increases with the number of financed properties you have. For one to four properties, it’s 2% of the total mortgage balances, for five to six, it’s 4%, and for seven to ten (for automated loans only), it’s 6%. This calculation excludes your primary residence, the new property, any properties being sold, and any mortgages being paid off at closing.
Simultaneous Second Home or Investment Property Transactions
If you’re getting mortgages for more than one second home or investment property at the same time, you can use the same reserves for both applications. You don’t need to double up. For instance, if one property requires $5,000 in reserves and another requires $10,000, you don’t need $15,000 total—just the higher amount of $10,000.
Examples of Reserves Calculations
Let’s look at some examples. If you have three financed properties, and one is a second home with a certain mortgage balance and monthly payment, you calculate two months of payments for reserves. Add 2% of the total mortgage balances on the other properties to get your total reserve requirement. With six financed properties, you’d use 4% of the total mortgage balances for the calculation, and for more than six properties (up to ten, and only for automated loans), you’d use 6%.
Additional Resources
For more detailed rules and examples, you can check other sections of the guide, such as those covering multiple financed properties, asset verification, and monthly housing expense calculations.
References
For more details, visit Minimum Reserve Requirements of the Fannie Mae Selling Guide.