Reserves are what's left in your accounts the day after closing. Lenders count them in months: one month of reserves equals one full house payment, including principal, interest, taxes, insurance, mortgage insurance and HOA dues. A lender that asks for 3 months wants to see enough savings to make three payments with no paycheck at all.
Counting your months
Take a $330,000 single-family FHA purchase with a $2,563.12 monthly payment. The buyer has $17,600 in savings and needs $13,250 at closing ($11,550 for the 3.5% down payment plus $1,700 in costs the seller credit didn't cover).
$17,600 minus $13,250 leaves $4,350. Divided by $2,563.12, that's 1.70 months of reserves, which is more than FHA asks for on this loan.
What each program asks for
| Program | Reserves required |
|---|---|
| FHA, 1 or 2 units, automated approval | None set by FHA; the findings may ask for some |
| FHA, 1 or 2 units, manual underwriting | 1 month |
| FHA, 3 or 4 units | 3 months |
| Conventional | Set by Desktop Underwriter; 6 months on a 2 to 4 unit home |
| VA, 2 to 4 units | 6 months when rent from the other units is used to qualify |
| USDA | No reserve requirement |
Even when a program doesn't require them, reserves strengthen an approval. On a manual FHA loan, 3 months on a 1 or 2 unit home counts as a compensating factor that raises the ratio limits.
A triplex buyer, before and after a gift
A buyer is purchasing a $450,000 triplex with FHA. The monthly payment is $3,543.79, so FHA's 3 months of reserves comes to $10,631.37. The buyer has $21,500 saved, and the seller credit covers closing costs.
| Buyer pays the down payment | Family gift pays the down payment | |
|---|---|---|
| 3.5% down payment | $15,750 from savings | $15,750 from the gift |
| Savings left after closing | $5,750 | $21,500 |
| Months of reserves | 1.62 | 6.07 |
| Meets FHA's 3 months | No | Yes |
FHA doesn't count gift money as reserves, but it does allow a gift for the down payment. Using the gift for the down payment leaves the buyer's own savings in place to count as reserves.
Where reserves can come from
Checking, savings and money market balances count in full. Stocks, bonds and vested retirement funds count too, sometimes at a reduced percentage. Lenders usually want two months of statements, and a large deposit that isn't from payroll needs a paper trail. Money that's borrowed, such as a cash advance or personal loan, doesn't count.
The cash to close calculator shows what you'll bring to the table, and whatever is left in savings is your reserves. If you're buying a 3 or 4 unit home, call AAA Capital Funding at 888-601-8344 and we'll set up the gift, seller credit and savings so the reserves line up before you make the offer.