Cash Reserve Requirements for Buying or Refinancing a Home

Cash reserve requirements can feel overwhelming when you’re ready to buy or refinance your primary residence, but don’t worry—we’ve got you covered!

In this blog post, we’ll break down everything you need to know about acceptable sources of cash reserves so that you can move forward with confidence. Let’s dive in!

What Are Cash Reserves and Why Do Lenders Require Them?

When purchasing or refinancing a primary residence, lenders want to ensure that you have money left over after the closing. This financial safety net is called cash reserves. Cash reserves help demonstrate to lenders that you have a cushion to cover mortgage payments in case of unexpected financial setbacks.

Typically, lenders require two months’ worth of your total mortgage payment, including:

• Principal and interest
• Property taxes
• Homeowners insurance
• Private mortgage insurance (PMI) if applicable
• Homeowners association (HOA) fees, if applicable

But what exactly counts as acceptable cash reserves? Let’s take a closer look.

Acceptable Sources of Cash Reserves

Lenders have specific guidelines for what can be used as cash reserves. Below are some common and acceptable sources:

1. Checking or Savings Accounts:
   The most straightforward and easily verifiable sources. Funds in these accounts are readily accessible and easy to prove.
2. Investments in Stocks, Bonds, and Mutual Funds:
   Liquid investments, such as stocks, bonds, and mutual funds, can count toward cash reserves. However, the value considered is often the amount after deducting any potential taxes and penalties.
3. Certificates of Deposit (CDs) and Money Market Funds:
   These are also acceptable sources because they are considered liquid assets that can be quickly converted to cash.
4. Retirement Accounts:
   Did you know that the amount vested in a retirement savings account can count as cash reserves? This includes 401(k), IRA, and other retirement accounts. However, only the vested amount, which is the portion you fully own, is considered.
5. Trust Accounts:
   Trust accounts with liquid assets can be used as reserves, provided the borrower has access to the funds.
6. Cash Value of a Vested Life Insurance Policy:
   Some life insurance policies have a cash value component that can be used for reserves, as long as it is vested and accessible.
7. Tax Refunds:
   If you are expecting a tax return refund, it can be included as an acceptable source of cash reserves.
8. Verified Gift Funds:
   Cash gifts from family members or close friends can be used, but they must be documented and verified according to the lender’s guidelines.
9. Liquidated Stocks, Bonds, or Retirement Assets:
   If you have liquidated investments or retirement assets, the full value of these can be used as cash reserves.

Unacceptable Sources of Cash Reserves

Just as it is important to know what counts as cash reserves, understanding what doesn’t count is equally critical. Here are some sources that are generally not accepted:

1. Non-Vested Assets:
   Funds that haven’t been vested, such as stocks held in unlisted corporations, non-vested stock options, and non-vested restricted stock, are not acceptable.
2. Personal Unsecured Loans:
   Any cash obtained through personal loans that are not secured by an asset cannot be used as reserves.
3. Interested Party Contributions (IPCs):
   These are contributions made by parties interested in the transaction, like sellers or real estate agents, and are generally not allowed.
4. Cash Proceeds from a Cash-Out Refinance Transaction:
   You cannot use the cash proceeds from a cash-out refinance as reserves for another loan.
5. Cash Stashed at Home:
   Lenders need to verify the source of your cash, and any money that isn’t traceable, like cash kept at home, will not be considered acceptable.

Why Transparency Matters

Transparency is key when it comes to cash reserves. Lenders need to see where your money is coming from to assess its stability and ensure it’s available when needed. Be prepared to provide detailed documentation for all sources of cash reserves.

Conclusion

Understanding these guidelines can make the home-buying or refinancing process smoother and less stressful. By knowing which assets count as acceptable cash reserves, you can better prepare and move forward with confidence.

If you have any questions or need further clarification, don’t hesitate to reach out. Our team is here to help you every step of the way!