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What are 'reserves'? When are they important?
What are reserves? When are they important?
What are reserves?
Reserves, in the mortgage industry, refer to a borrower's assets AFTER the closing of a new loan. Basically, if the borrower were to lose all income, how much in reserve do they have to continue to make mortgage payments. Reserves differ from assets, because while some reserves are assets, not all assets are considered reserves.
Generally speaking, reserves are assets which a client can get access to and pull from. It can get complicated when talking about some types of assets such as retirement plans. For example, if a borrower has a 401K with $50,000 in it and there's a clause that states they can use the 401K, penalty free, for the purchase of a first home, then the borrower may use the entire $50,000 as assets toward a home purchase. However, if they are not using that 401K for the purposes of buying a home or getting a loan, a lender will only consider a percentage of the asset as "reserves". Why is this? Well, many investments can (and in 2008, did) decline drastically in value, so a lender sets these rules to ... more
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