Essential Guide to Mortgage Reserves: Requirements and Tips

What Are Mortgage Reserves?

Mortgage reserves act as an emergency fund for your mortgage payments. They aren’t always required, and the amount needed can vary based on the type of mortgage and your specific situation. When required, you may need to show proof of assets that cover up to six months’ worth of expected monthly payments, sometimes more.

When Do You Need Mortgage Reserves?

The necessity and amount of mortgage reserves depend on several factors:

• Your credit scores
• Your debt-to-income ratio (DTI)
• Your loan-to-value ratio (LTV) and combined LTV (CLTV) ratios
• The type of mortgage
• The number of units in the property
• If it’s your primary residence

For instance, you might not need mortgage reserves if you’re getting a conforming conventional loan for a single-family home as your principal residence, with a credit score of 700, an LTV over 75%, and a DTI at or below 36%. However, you might need six months of reserves if your credit score is lower or if your DTI is above 36%. Mortgage reserves are more commonly required for investment properties or multi-unit properties.

How Much Are Mortgage Reserves?

If mortgage reserves are required, the amount is often measured in months and is based on your monthly principal, interest, taxes, and insurance (PITI) payments, including:

• Principal
• Interest
• Taxes
• Insurance
• HOA dues (if applicable)

For example, if your monthly expenses are $3,000, your mortgage reserve requirement might be six times that amount, or $18,000.