Mortgage reserves are funds you have left after closing. Lenders use them to confirm that you still have money available after your down payment and closing costs are paid.
Reserves are usually measured in months of your monthly housing payment. That payment is often called PITIA, which stands for principal, interest, taxes, insurance and association dues when they apply.
There is no single mortgage reserve requirement for every borrower. The amount you may need depends on the loan program, property type, occupancy, underwriting result and how many financed properties you own.
Mortgage Reserve Requirements Basics
| Loan Scenario |
Common Reserve Requirement |
What To Know |
| One-Unit Primary Residence |
Often no minimum reserve requirement for many conventional DU files |
Requirements depend on the underwriting result and borrower profile |
| Second Home |
Two months for Fannie Mae DU casefiles |
Reserves help document that you can carry another housing payment |
| Investment Property |
Six months for Fannie Mae DU casefiles |
Rental income, vacancy and repair risk can affect underwriting |
| Two- To Four-Unit Primary Residence |
Six months for Fannie Mae DU casefiles |
Multiunit properties generally carry additional risk |
| Multiple Financed Properties |
Additional reserves may apply |
The calculation can depend on unpaid mortgage balances for other financed properties |
What Mortgage Reserves Are
Mortgage reserves are liquid or near-liquid assets available after closing. They are separate from your down payment and closing costs because those funds are spent to complete the purchase or refinance.
Fannie Mae defines liquid financial reserves as assets available after closing that can be converted to cash through withdrawal, sale, redemption of vested funds or a loan secured by eligible assets. Fannie Mae also says reserves are measured by the number of months of the qualifying payment amount for the subject mortgage based on PITIA.
What Counts As Mortgage Reserves
Eligible reserve assets can include funds that are readily available or can be converted to cash.
Common examples include:
- Checking accounts
- Savings accounts
- Money market accounts
- Certificates of deposit
- Stocks
- Bonds
- Mutual funds
- Vested retirement funds
- Cash value of vested life insurance
Fannie Mae lists checking and savings accounts, investments, vested retirement savings and vested life insurance cash value as examples of acceptable reserve assets.
What Usually Does Not Count As Reserves
Not every asset, credit or borrowed fund can count toward reserves.
For conventional loans, Fannie Mae says unacceptable reserve sources include unvested funds, personal unsecured loans, rent-back credits, interested party contributions, lender contributions and cash proceeds from a cash-out refinance on the subject property.
How To Calculate Mortgage Reserves
Use this formula:
Eligible reserves divided by monthly PITIA equals months of reserves.
If you have $12,000 in eligible reserves and your monthly PITIA is $3,000, you have four months of reserves.
| Eligible Reserves |
Monthly PITIA |
Reserve Months |
| $12,000 |
$3,000 |
4 months |
| $18,000 |
$3,000 |
6 months |
| $24,000 |
$4,000 |
6 months |
What PITIA Includes
PITIA generally includes:
- Principal
- Interest
- Property taxes
- Homeowners insurance
- Association dues, when applicable
Mortgage insurance may also be included when it applies to the qualifying housing payment.
Conventional Mortgage Reserve Requirements
Conventional mortgage reserve requirements depend on the transaction, occupancy status, amortization type, number of units and number of financed properties. Fannie Mae lists these factors as part of determining minimum required reserves.
For Fannie Mae Desktop Underwriter casefiles:
- One-unit principal residence transactions have no minimum reserve requirement in many cases.
- Second home transactions require two months of reserves.
- Two- to four-unit principal residence transactions require six months of reserves.
- Investment property transactions require six months of reserves.
- Cash-out refinances with DTI ratios greater than 45% require six months of reserves.
- Borrowers with multiple financed properties may need additional reserves.
Multiple Financed Properties
Borrowers with multiple financed properties may need additional reserves for properties other than the subject property and the borrower’s principal residence.
Fannie Mae’s DU reserve calculation for other financed properties is based on a percentage of unpaid principal balances for mortgages and HELOCs:
- One to four financed properties require 2%.
- Five to six financed properties require 4%.
- Seven to 10 financed properties require 6%.
Fannie Mae’s multiple financed property policy applies to borrowers who are personally obligated on more than one financed property, subject to specific exclusions.
FHA Reserve Requirements
FHA loan reserve requirements depend on the property type and underwriting method.
For FHA loans:
- One- and two-unit primary residences typically do not require reserves when the loan receives an acceptable automated underwriting result.
- Manually underwritten one- and two-unit loans generally require at least one month of PITI in reserves.
- Three- and four-unit properties generally require at least three months of PITI in reserves.
- Additional reserves may be needed when reserves are used as a compensating factor on a manually underwritten file.
FHA policy is governed by HUD’s Single Family Housing Policy Handbook 4000.1.
VA Reserve Requirements
VA loans generally do not require a fixed number of reserves for a standard primary residence loan. However, reserves may be required when rental income is used to qualify.
For VA loans:
- If income from an existing rental property is used to qualify, the borrower generally needs cash reserves equal to three months of PITI for that rental property.
- If a borrower buys a multiunit property and uses projected rental income from the other units to qualify, the lender may require six months of mortgage payments in reserves.
- Liquid assets can also strengthen the overall underwriting review, even when a fixed reserve amount is not required.
Federal VA underwriting regulations state that when rental property income is used to qualify, the lender should obtain documentation for a self-employed applicant along with evidence of cash reserves equal to three months of PITI on the rental property.
USDA Reserve Requirements
USDA guaranteed loans do not have a universal reserve requirement for every borrower. Reserves are most relevant when the lender needs compensating factors for a debt ratio waiver.
For USDA guaranteed loans:
- GUS Accept or Accept Full Documentation files do not require debt ratio waivers.
- GUS Refer, Refer With Caution or manually underwritten files may require compensating factors if a debt ratio waiver is needed.
- Cash reserves equal to at least three months of PITI after closing may be used as an acceptable compensating factor.
- Cash on hand is not eligible as a compensating factor.
Why Mortgage Reserves Matter
Reserves can show that you have money available after closing. They may matter more if your loan file includes added risk factors.
Reserves can be especially important if you have:
- Variable income
- Self-employment income
- A higher DTI ratio
- Multiple financed properties
- Rental property expenses
- A second home
- An investment property
- A cash-out refinance
Strong reserves do not guarantee mortgage approval. They can help support the overall underwriting review when the rest of the file meets program requirements.
How To Build Mortgage Reserves Before Applying
Start by estimating your cash to close and your target reserve amount. Then separate your reserve funds from your down payment and closing cost funds.
Ways to build reserves include:
- Set up automatic savings transfers.
- Reduce discretionary spending before applying.
- Keep reserve funds in documented accounts.
- Avoid unnecessary transfers between accounts.
- Keep records for large deposits.
- Review whether vested retirement funds may count.
- Confirm whether eligible gift funds can be used for reserves.
Fannie Mae allows funds from acceptable sources to supplement borrower funds for reserves. Eligible gift funds may be used to satisfy reserve requirements, but gifts of equity may not. (https://selling-guide.fanniemae.com/sel/b3-4.1-01/minimum-reserve-requirements)
Documentation Tips
Lenders usually need clear documentation for reserve assets.
Be ready to provide:
- Bank statements
- Retirement account statements
- Investment account statements
- Gift letters, when applicable
- Transfer records
- Explanations for large deposits
Avoid moving money between accounts without a clear paper trail. Transfers can create additional documentation requests during underwriting.
Bottom Line
Mortgage reserve requirements are not the same for every borrower. The amount you need depends on your loan program, property type, occupancy, underwriting result and number of financed properties.
Many one-unit primary residence loans may not require reserves. Second homes, investment properties, multiunit properties, cash-out refinances and borrowers with multiple financed properties are more likely to need documented reserves.
Frequently Asked Questions
Are Mortgage Reserves Always Required?
No. Many one-unit primary residence loans do not require reserves, but the requirement depends on the loan type, underwriting system, property type and borrower profile.
How Many Months Of Reserves Do I Need?
It varies. Some borrowers may need no reserves. Others may need one month, two months, three months, six months or additional reserves based on the loan program and property count.
Can Retirement Accounts Count As Mortgage Reserves?
Yes, in some cases. Fannie Mae allows the vested amount in a retirement savings account to count as reserves. (https://selling-guide.fanniemae.com/sel/b3-4.1-01/minimum-reserve-requirements)
Can Gift Funds Count As Reserves?
Eligible gift funds may be used to satisfy Fannie Mae reserve requirements, but gifts of equity may not. Program rules vary, so borrowers should confirm how gift funds will be treated for their specific loan.
Do Reserves Help If My DTI Is High?
They can. Strong reserves may help show that you have financial capacity after closing, especially when your file has added risk factors such as a higher DTI ratio, variable income or multiple financed properties.
Do FHA Loans Require Reserves?
FHA reserve requirements depend on the property and underwriting method. Standard one- and two-unit primary residence loans often have fewer reserve requirements than manually underwritten loans or three- to four-unit properties.
Do USDA Loans Require Reserves?
USDA guaranteed loans do not have a universal reserve requirement for every borrower. Cash reserves may be used as a compensating factor when a debt ratio waiver is needed. USDA guidance identifies cash reserves equal to at least three months of PITI after closing as an acceptable compensating factor in that context.
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