One critical aspect of the loan process that often gets overlooked in mortgage lending is that of liquid savings – also known as reserves. This can become a major issue as many borrowers are not aware that reserves can make or break a loan approval when it comes to a purchase home loan.
Simply put, reserves are liquid funds/assets that are left remaining or not utilized in the mortgage transaction. Some common examples of reserves include checking, saving, investment, and retirement accounts.
Reserves are a requirement on many types of mortgage loans. The exact amount needed in reserves varies based on numerous factors such as: transaction type (purchase vs refinance), occupancy type (primary residence vs second/investment homes), number of units, number of other properties financed, and/or specific loan programs. This is fairly straightforward although borrowers do not realize that funds in excess of down payment and closing costs are required until it is explained to them.
In some cases, reserves are not a requirement for a specific loan program but might be for a specific loan scenario in order to obtain an approval. Excess reserves can be used to offset risk factors on loans garnering approval for borrowers which otherwise wouldn’t have been able to obtain an approval.
For example, a borrower who has poor credit scores would very likely benefit from having excess reserves. It would be considered a ‘compensating factor’ which would help the borrower qualify more readily.
