How Much Do You Need in Cash Reserves to Get a Mortgage?

Homebuying costs don’t stop with your down payment.

Updated on May 23, 2022

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If you’ve saved up enough cash for a down payment, you might assume you’re in good shape to purchase a home. Unfortunately, you’ll need more cash—quite a bit more, in fact—to get approval to close on your mortgage loan.

In addition to the down payment, closing costs, and other fees you’ll need to pay your lender, you may also need cash reserves on hand. Here’s a rundown on what that means.

What Are Cash Reserves?

Even if you have plenty of income to meet your loan obligations, your lender wants to feel confident that you have enough cash on hand—or in “reserve”—to pay your mortgage in the event you lose your job or experience a decrease in income.

Money in a savings or checking account qualifies as cash reserves, of course. However, lenders will also accept anything liquid—meaning it can quickly be turned into cash if necessary. This includes things like:

401(k)s, IRAs, and other retirement accounts
Stocks
Bonds
Mutual funds
Money market funds
Certificates of deposit
Life insurance policies
Trusts

Note

Lenders don’t consider your car, or another property you own, as part of your reserves since they can’t easily be converted into cash. What if your jewelry collection is worth five figures? Sorry, it won’t help—household belongings also don’t qualify.

How Much Do You Need in Cash Reserves?

The exact amount of cash reserves you’ll need will depend on your loan type, your credit score, and the amount of your loan versus the purchase price, or the loan-to-value ratio. In most cases, though, lenders will want to see at least a few months of housing payments in liquid assets. The lower your credit score, the higher the reserves a lender will want you to have available.

Note

Keep in mind that the full payment includes the portions that go toward your home loan's principal balance, interest, taxes, and insurance. In some cases, it may also include dues for your homeowner’s association, mortgage insurance premiums, or payments on second loans.

Use the mortgage calculator below to get a sense of what your monthly payment could end up being.

FHA Loans

On FHA loans, you may need cash reserves if your loan needs to be manually underwritten. That typically happens if you don't have a credit score or if your credit score is low.

If you're buying a one- or two-unit property, you’ll need enough to cover at least one month of your expected total mortgage payment. If you’re an investor looking to buy a three- or four-unit property, you’ll need enough for at least three monthly payments.

Conventional Loans

You may need cash reserves with a conventional mortgage. The required cash reserves for these loans, like those backed by Fannie Mae and Freddie Mac, can range from zero to six months’ worth depending on your credit score and other factors.

If you’re buying an investment property, you’ll need anywhere from two to eight months of payments, depending on the size of the home, your credit score, the loan-to-value ratio, and the number of properties you currently have financed. You may be required to have enough reserves on hand to cover several months of payments for each investment property you own.

VA and USDA Loans

VA and USDA loans don’t require cash reserves as long as you’re buying a single-family home you intend to occupy. However, whether or not you have reserves on hand may be considered during the underwriting process when factors like your interest rate are being assessed. Investors who will be relying on rental income from a property to make mortgage payments, on the other hand, need six months of reserves with VA loans.

If You Don’t Have Enough Cash for Your Reserve

If you don’t think you have enough liquid savings to meet the reserve requirements, don’t panic. First, you may not need as much as you think, especially if you have strong credit and have a low loan-to-value ratio. If you qualify for a VA or USDA loan, you may not need any cash reserves at all.

Otherwise, you’ll either need to increase your savings or beef up your other qualifications to qualify for a lower reserve.

Other Cash You Will Need

Remember that your reserves aren’t the only cash you need to purchase a house. In addition to these funds, you’ll also need money for your down payment and closing costs. While down payments vary, closing costs can be 3% to 7% of the purchase price.

Finally, even if you have enough cash to cover all your loan requirements, keep in mind that homeownership often comes with unexpected expenses and repair bills. It doesn’t hurt to save more to ensure you still have a financial safety net once you’ve closed on the loan.

Frequently Asked Questions (FAQs)

What will my reserve mortgage requirements be when I plan on collecting rental income?

While there are benefits to rental properties, they won't affect liquid cash reserve requirements. Plans to collect rent will improve your projected income, but it won't add to your cash reserves. In other words, your reserve requirements will likely remain the same.

How do you calculate reserves for a mortgage?

Reserve requirements are typically given in terms of months. To calculate the dollar amount of the requirement, just multiply the number of months by your monthly mortgage payment.

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