An often overlooked mortgage underwriting guideline is Cash Reserves (aka Post-Closing Liquidity). While not all loan programs require Cash Reserves, it is important to know what assets are eligible (and at what percentage). A good way to visualize Cash Reserves is to determine what is left on deposit "after all the smoke clears" when money was used to buy a home.
As a rule of thumb, whenever a Borrower is pursuing a Jumbo (aka Non-Conforming Loan) and/or if that Borrower has (or is purchasing) Rental Property (aka Non-Owner Occupied), Cash Reserves will typically be required.
Do all assets count for Cash Reserves? The answer is no. Assets must be on deposit in a Financial Institution to be eligible. In other words, no "mattress money" can be used, nor can we look at other forms of Assets (such as Real Estate, Automobiles, Jewelry, Term Life Insurance Policies, etc.).
Examples of eligible Assets for Cash Reserves are typically: Checking, Savings, & Money Market Accounts, Certificates of Deposit (CD's), Stocks, Bonds, Mutual Funds, IRA's, and 401K's. With that in mind, we cannot give "dollar-for-dollar" credit to Retirement Accounts (as Lenders know there are withholdings present when withdrawing funds from a Retirement Account early which would not allow the Borrower to liquidate their entire IRA balance).
Below is an example of Assets which may be used as Cash Reserves, what percentage they are given for mortgage approval guidelines, and what specific documentation is required for each.
An example of a Cash Reserve requirement is as follows:
- Borrowers live in "Property A" and will be departing this residence (and converting this home into a Rental Property)
- Borrowers are seeking to apply for a Jumbo Loan on "Property B" (which will be their new Primary Residence)
Cash Reserves are typically based on the full monthly "PITIA" payment on each property. PITIA is as follows:
- Principal + Interest (PI)
- Property Taxes (T)
- Homeowners Insurance (I) - also Private Mortgage Insurance (when applicable)
- Homeowners Association Dues (A) - when applicable
Let's say that the monthly PITIA payment for "Property A" is $3000.00, while the proposed new monthly mortgage payment for "Property B" will be $5000.00.
At least one Jumbo loan program (as of the time this article was published) calls for Cash Reserves of 6 Months PITIA on the "subject property" (the loan being acquired now, which in this case is for "Property B"), along with 2 Months PITIA on all other financed properties (which in this case is "Property A"). These particular guidelines are for loans less than $1Million with a Loan-to-Value (LTV) of 80% or less. Other combinations of data on a loan application will alter these guidelines in most cases.
With the above in mind, we would need a total of $36,000 in Cash Reserves (aka Post-Closing Liquidity), broken down as follows: (6 x $5000 = $30,000 for "Property A" + 2 x $3000 = $6000 for "Property B")
Please be mindful that Underwriting Guidelines are constantly changing and vary between Lenders in many cases. While the above table is accurate as of the posting of this article, it is best to always consult a Mortgage Loan Officer for details & context of Cash Reserves (aka Post-Closing Liquidity) and other Underwriting Guidelines. I am happy to assist whenever desired.
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