B3-4.1-01, Minimum Reserve Requirements (08/07/2024)

Liquid financial reserves are those liquid or near liquid assets that are available to a borrower after the mortgage closes. Liquid financial reserves include cash and other assets that are easily converted to cash by the borrower by

• drafting or withdrawing funds from an account,

• selling an asset,

• redeeming vested funds, or

• obtaining a loan secured by assets from a fund administrator or an insurance company.

Reserves are measured by the number of months of the qualifying payment amount for the subject mortgage (based on PITIA) that a borrower could pay using their financial assets. For monthly housing expense and qualifying payment requirements, see B3-6-03, Monthly Housing Expense for the Subject PropertyB3-6-03, Monthly Housing Expense for the Subject Property and B3-6-04, Qualifying Payment RequirementsB3-6-04, Qualifying Payment Requirements.

The definition of reserves applies to both manually underwritten mortgage loans and loan casefiles underwritten through DU. Funds to close are subtracted from available assets when considering sufficient assets for reserves.

Examples of liquid financial assets that can be used for reserves include readily available funds in

• checking or savings accounts;

• investments in stocks, bonds, mutual funds, certificates of deposit, money market funds, and trust accounts;

• the amount vested in a retirement savings account; and

• the cash value of a vested life insurance policy.

The following cannot be counted as part of the borrower’s reserves:

• funds that have not been vested;

• funds that cannot be withdrawn under circumstances other than the account owner’s retirement, employment termination, or death;

• stock held in an unlisted corporation;

• non-vested stock options and non-vested restricted stock;

• personal unsecured loans;

• rent-back credit;

• interested party contributions (IPCs) (see B3-4.1-02, Interested Party Contributions (IPCs)B3-4.1-02, Interested Party Contributions (IPCs));

• any amount of a lender contribution (see B3-4.3-06, Grants and Lender ContributionsB3-4.3-06, Grants and Lender Contributions); and

• cash proceeds from a cash-out refinance transaction on the subject property.

Funds received from acceptable sources may be used to supplement the borrower’s funds to satisfy any financial reserve requirement.

Note: Eligible gift funds (but not gifts of equity) may be used to satisfy reserve requirements.

Minimum required reserves vary depending on

• the transaction,

• the occupancy status and amortization type of the subject property,

• the number of units in the subject property, and

• the number of other financed properties the borrower currently owns.

Manually underwritten loans: The minimum required reserves are documented in the Eligibility Matrix.

DU loan casefiles: DU will determine the reserve requirements based on the following:

• Two months' reserves for a second home transaction.
• Six months' reserves for the following:
  • a two- to four-unit principal residence transaction,
  • an investment property transaction, and
  • a cash-out refinance transaction with a DTI ratio greater than 45%.
• Additional reserves are required when a borrower has multiple financed properties and the subject loan is secured by a second home or investment property. See Calculation of Reserves for Multiple Financed Properties below for additional details.
• Reserves equal to the balance of 30-day accounts (reduced by the cash back received on a refinance transaction).
• Additional reserves may need to be verified based on DU's overall risk assessment.

Note: There is no minimum reserve requirement for one-unit principal residence transactions. High LTV refinance loans are exempt from the minimum reserve requirements.

If the borrower owns other financed properties (determined in accordance with B2-2-03, Multiple Financed Properties for the Same BorrowerB2-2-03, Multiple Financed Properties for the Same Borrower), additional reserves must be calculated and documented for financed properties other than the subject property and the borrower’s principal residence. The other financed properties reserves amount must be determined by applying a specific percentage to the aggregate of the outstanding unpaid principal balance (UPB) for mortgages and HELOCs on these other financed properties. The percentages are based on the number of financed properties:

• 2% of the aggregate UPB if the borrower has one to four financed properties,

• 4% of the aggregate UPB if the borrower has five to six financed properties, or

• 6% of the aggregate UPB if the borrower has seven to ten financed properties (DU only).

The aggregate UPB calculation does not include the mortgages and HELOCs that are on

• the subject property,

• the borrower’s principal residence,

• properties that are sold or pending sale, and

• accounts that will be paid by closing (or omitted in DU on the online loan application).

If a lender is processing multiple second home or investment property applications simultaneously, the same assets may be used to satisfy the reserve requirements for both mortgage applications. Reserves are not cumulative for multiple applications.

Example: A lender is simultaneously processing two refinance applications for two investment properties owned by the borrower. The application for property A requires reserves of $5,000. The application for property B requires reserves of $10,000. Because the reserves are covering the same properties, the lender does not have to verify $15,000 in reserves, but only those required per each application.

The following tables contain examples of reserves calculations for borrowers with multiple financed properties.

Example 1: Three Financed Properties

Example 2: Six Financed Properties

Example 3: Eight Financed Properties (DU ONLY)

• B2-2-03, Multiple Financed Properties for the Same BorrowerB2-2-03, Multiple Financed Properties for the Same Borrower;

• B3-4.4-01, DU Asset VerificationB3-4.4-01, DU Asset Verification;

• B3-6-03, Monthly Housing Expense for the Subject PropertyB3-6-03, Monthly Housing Expense for the Subject Property; and

• B3-6-04, Qualifying Payment RequirementsB3-6-04, Qualifying Payment Requirements.