Do I need reserves for a conventional loan?
It depends on the home and your file. Fannie Mae sets no minimum reserves for a one-unit home you will live in, though its automated underwriting can still ask for some based on risk. A second home needs two months of the full housing payment, and an investment property or a two- to four-unit home you live in needs six. On a second-home or investment loan, other financed properties can add reserves.
Educational answer from Mortgage Expert. Mortgage Expert's licensed loan originator is Shahram Sondi, Florida mortgage broker, Certified Mortgage Advisor™, NMLS 186790. Sources checked .
How it works
What reserves are
Reserves are money you still have after closing. Fannie Mae measures them in months of your full housing payment on the new loan: principal, interest, taxes, insurance and any HOA dues (PITIA).
They show you could keep paying if your income stopped for a while. That is why the rules ask for more when the risk is higher.
Fannie Mae's rules in Desktop Underwriter
Desktop Underwriter (DU) is Fannie Mae's automated system, and it sets the requirement for each file. A one-unit home you will live in has no fixed minimum. A second home needs two months.
Six months is required for a two- to four-unit home you live in, an investment property, or a cash-out refinance when your debt-to-income ratio (DTI) is above 45%. DU can add more based on its overall risk review. Manually underwritten loans follow Fannie Mae's Eligibility Matrix instead. Lenders can also require more than Fannie Mae.
Owning other financed properties
For a second-home or investment transaction, Fannie Mae generally adds reserves for other financed properties, based on their combined unpaid balances; HomeReady has an exception. It is 2% of that total with one to four financed properties, 4% with five or six, and 6% with seven to ten.
The total leaves out the home you are buying or refinancing, your own residence, homes sold or under contract to sell, and debts paid off at closing.
What counts
Checking and savings, stocks, bonds, mutual funds, CDs and money market funds count. So does the vested amount in a retirement account you can withdraw from, and you do not have to cash it out. Eligible gift funds can count too.
Some things do not count: unvested funds, personal unsecured loans, seller or lender contributions, and cash-out money from refinancing the same home. If you borrowed against an account, the lender subtracts the loan from its value.
Buying a rental while owning two others
Illustrative example. This is not a real borrower or loan offer. The housing payment and balances are assumptions, and DU may ask for more.
An investor is buying a one-unit rental. The new loan's full monthly housing payment is assumed to be $2,500. The investor also owns two other rentals with mortgages, with $300,000 in combined unpaid balances, and lives in a home that also has a mortgage.
| Item | Amount |
|---|---|
| Monthly housing payment on the new rental (assumed) | $2,500 |
| Six months on the new rental | $15,000 |
| 2% of other financed rentals' balances | $6,000 |
| Total reserves needed | $21,000 |
The math, step by step
- Subject property: $2,500 × 6 = $15,000.
- The buyer has four financed properties including the new rental and their own home, so the 2% tier applies. The reserve base excludes the new rental and their own home: $300,000 × 2% = $6,000.
- Total: $15,000 + $6,000 = $21,000 left over after the down payment and closing costs.
Takeaway: This investor needs $21,000 still in the bank after closing. Plan for that early, because it is on top of the down payment and closing costs.
Easy things to get wrong
- Reserves are what is left after closing. Money used for the down payment or closing costs does not count twice.
- A seller credit cannot be used for reserves. Neither can a lender credit.
- If you borrow against your 401(k) for the down payment, the same account counts for less in reserves.
- Large deposits in the accounts you use for reserves may need to be sourced on a purchase.
What to do next
Add up what you will have left after the down payment and closing costs. Then compare it with the months the rules ask for on your home type.
Own other properties or buying a rental? Shahram Sondi can add up the reserves your file would need before you write an offer.
Check the sources
- Fannie Mae Selling Guide B3-4.1-01: minimum reserve requirements
- Fannie Mae Selling Guide B3-4.3-03: retirement accounts
- Fannie Mae Selling Guide B3-6-05: monthly debt obligations (loans secured by financial assets)
Sources checked . Program guidance and lender requirements can change.
Ask the question. Get the straight answer.
Send the scenario and I'll tell you what I'm seeing. No application fee. No long form just to get a basic answer.
More conventional questions on Down Payment.
Educational only. Conventional loan guidelines, lender overlays, rates, fees, PMI, LLPAs, and underwriting requirements can change. Final eligibility depends on full underwriting review. Mortgage Expert, Inc. is not affiliated with Fannie Mae, Freddie Mac, FHFA, or any government agency.
