“Reserves” include the liquid funds available to a borrower after a transaction closes. In other words, reserves are funds left over after all down payment and closing cost funds are paid into escrow. For FHA buyers and conventional buyers of single-unit, owner-occupied properties, reserve-requirements are rarely an issue. Most owner-occupied loans require little to no reserves. In fact, buyers can literally exit escrow completely out of cash.
Reserve requirements become an issue for buyers when they own multiple properties, when they are buying units or investment properties, or when they are seeking “jumbo” financing.
Reserve requirements are usually expressed in terms of “PITI” (Principal, Interest, Taxes, Insurance). Lenders usually require anywhere from 2 to 12 months of reserves (2 to 12 times PITI), depending on the loan product. Buyers with multiple properties are required to have several months of PITI for every property. Jumbo lenders are often the most exacting, sometimes requiring 12 months (or more) of reserves.
Retirement accounts can be used towards reserves – 65% to 75% of the current balance, depending on the lender.
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