How Much Do You Need in Cash Reserves to Get a Mortgage?
Homebuying costs don’t stop with your down payment.
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’ll also need what are called “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 that is liquid—meaning it can quickly be turned into cash if necessary. This includes things like:
- 401(k)s, IRAs and other retirement accounts
- Mutual funds
- Money market funds
- Certificates of deposit
- Life insurance policies
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, and insurance policies, 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 vs. the purchase price, or the loan-to-value ratio. You can assume, however, that lenders will want to see at least a few months of housing payments in liquid assets.
Keep in mind that in the full payment includes the portions that go toward the 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.
On FHA loans, you’ll need enough to cover at least three months 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 six monthly payments.
The required cash reserves for conventional 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 12 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.
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. Investors, on the other hand, need three to six months of reserves with VA loans, and three months with USDA 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. And 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 in order 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 widely, closing costs tend to clock in between 2% and 5% 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. So it doesn’t hurt to save more, in order to make sure you still have a financial safety net once you’ve closed on the loan.
HUD.gov: Underwriting Requirements Manual
VA.gov: Requirements for VA Loans
United States Department of Agriculture and Rural Development: Underwriting Overview for USDA Loans