Mortgage reserves are assets you have but do not use for closing costs or down payment. Reserves can turn a denial into an approval since the automated underwriting computer loves reserves. The amount of reserves is determined by the computer and because of the mortgage crisis; reserves have become even more important to mortgage lending.
The mortgage company sets up a reserve fund to ensure the escrow account has sufficient funds to pay expenses, even if the borrower starts missing payments. The mortgage servicer calculates the amount of the reserve and bills the borrower to fund the reserve, adding that amount to the monthly payments.
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The term "cash reserves" refers to extra money the borrower has in the bank on closing day. These funds go above and beyond what is needed for the down payment and closing costs. Some lenders have cash-reserve requirements on top of all their other mortgage criteria (credit scores, debt ratios, etc.).
Asset Requirements when applying for a mortgage loan. When applying for a mortgage loan other than a No-Documentation type of loan you will be required to provide verifiable information about your liquid assets to cover your down payment, pay closing cost, and make your monthly mortgage payments (reserves) going forward after you close your loan.
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Mortgage reserves to buy a home are funds that you will have after closing. So you can make your payments if your income stops temporarily or you have an unexpected financial emergency.
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The escrow/reserves deposit is calculated based on the number of months before the next tax bill is due against the number of months the lender will have collected through the mortgage payments from the date of closing. For example, if you are closing in January then your first mortgage payment will be due on March 1.
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