Mortgage reserves are assets you have but do not use for closing costs or down payment. Reserves can turn a denial into an approval since the automated underwriting computer loves reserves.

The amount of reserves is determined by the automated underwriting and because of the mortgage crisis; reserves have become even more important to mortgage lending.

Mortgage Reserves Definition

Reserves are defined as assets like cash, vested amount in retirement account, stock, cash value of life insurance, or bonds. And when we say cash we mean the money kept in a checking or savings account. Actual paper money is never used in any part of mortgage closing costs, down payment, or reserves. A mortgage lender wants to make sure you didn’t get your money illegally. And if all you have is cash that is not in a checking or savings account, they don’t know where it came from.

The first part of the reserve requirement is how many reserves you have. The automated underwriting will tell your loan officer or broker how much is needed. For example, it may say it only needs 2 months PITI (principal, interest, taxes, and insurance). If your PITI is $1300, then you need to show $2600 total reserves. And, you can only use 70% of the vested amount in a retirement account.

The second part is how you prove mortgage reserves. You need to show either one or two month’s bank statements or other statements depending on the asset. If there is a large deposit on a statement, the underwriter will ask you to explain it and ask for the asset that it came from.

If you sold a car and deposited the money in your bank account, the underwriter will see the large deposit. You will have to provide the bill of sale to show you had ownership of the asset and that is where the money came from.

Mortgage reserves can really turn a denial into an approval. Back when we originated loans, we saw this all the time. If you have a high mortgage debt to income ratio for example, the computer will look for other parts of your picture to see if they are strong. 30 months of reserves in a retirement account can turn a negative looking loan into a very strong and positive one.

Your loan officer or broker should ask you in depth about your assets because they can turn a denied file into an approval. Mortgage reserves are that important.

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