Cash Reserves After Closing - How Important Are They? Inflation...Or Not

Four of our borrowers starved to death shortly after moving into their homes last year.

This is because our poor borrowers had no money to buy food because most loan programs do not require any cash reserves in a buyer’s bank account after their loan closes.

In other words, most loan programs allow borrowers to completely wipe out every penny of cash they have along with their 401ks and stock accounts.

So, while I am being facetious above (nobody starved to death 😊), I am amazed that borrowers are allowed to deplete every penny of liquidity.

Fannie Mae, Freddie Mac, and FHA (used to finance about 80% of all purchases) require no reserves at close for most owner-occupied purchases.

What Are Reserves & Why Are They So Important?

Reserves are liquid assets remaining in a borrower’s account after close of escrow. They can be cash, stocks, 401k funds, IRA funds and/or any other relatively “liquid” (easily salable) instrument, e.g. cash value of life insurance, bonds, etc.

Reserves are so important because most jumbo lenders require them – because they want to make sure borrowers have enough funds to continue making their mortgage payments in the event of a job loss, medical emergency, or any event that might cause a loss of income.

Fannie Mae and Freddie Mac also require them for most investment and 2nd home purchases, as well as for the purchase of two to four units.

More Reserves = Much Lower Rate!

But, perhaps most importantly, our best jumbo investors require “substantial reserves.” This means that borrowers, who have enough funds for a large down payment, closing costs, and ample reserves after close of escrow, can qualify for interest rates that are sometimes as much as 1% LOWER than loan programs that require fewer or no reserves.

So yes, reserves are extremely important for many borrowers in the jumbo and/or investment arenas.

Can’t Always Count 100% Of Retirement Accounts

While cash and stocks outside of retirement accounts can always be counted 100% towards reserves, funds within retirement accounts cannot.

Many lenders and investors (that buy loans) discount retirement funds by 30% to 40% if those funds cannot be withdrawn without penalty.

Fannie and Freddie, however, count 100% of all retirement funds towards reserves – whether there are withdrawal penalties or not.

How Much Reserves Do Borrowers Need?

Our best jumbo investor requires 12 full months of housing payments to be in the borrower’s account after close of escrow. This investor also discounts most retirement funds by 40% and will only allow up to six months of reserves to be met with retirement funds (the rest need to be very liquid, such as checking, savings, or brokerage accounts).

Other investors require anywhere from one to six months of housing payments for reserves – depending on the loan amount, property usage (owner vs. non-owner), and other qualifying factors like credit score.