If you were to search “reserves” online, you would likely find the top returns for your search would yield military or banking-related results.

It’s not a coincidence that such a term is primarily tied together with these two areas of our federal government. By broad definition, having reserves simply means you are stronger.

However, in the sporting world, you don’t want to be on the injured reserve list as that would be counter-intuitive. Instead, by having a deep bench of healthy players it would give you an advantage against the competition. It’s really no different with any other use of “reserves” either. Generally speaking, it doesn’t matter how you refer to “reserves” because it frequently carries a positive tone.

If you are applying for a home loan, depending on the program you are using, you will find that your lender may have different reserve requirements that must be met.

As an example, one of the more common requests from your lender might be for the collection of reserves to satisfy recurring property tax and home insurance bills that need to be paid on an annual basis. By collecting a specific amount from you in advance at the time your loan is closed, whether on a purchase or refinance, allows your lender to establish what is called an escrow or impound account to help you make these payments.

Although often times this reserve account for property taxes and home insurance is requested by the borrower as well because it’s a convenient way of budgeting each month for property related expenses.

Typically, your lender will require you to have this reserve account should you have less than a 10 percent down-payment on a purchase or less than 10 percent equity in your home on a refinance. Nonetheless under certain loan program guidelines, despite your down-payment or equity position, the reserve account is not an option and it is a hard requirement.

That said, it’s still your money but it’s just being held in a third-party account. For illustrative purposes only, a security deposit in a rental scenario could be the nearest you can get to a comparison.

Lastly, the reserves your lender may request from you can also be assets that do not have to be maintained in a third-party account. Normally they are reserves that are considered in the overall approval process of your loan, such as funds held in your retirement or savings accounts. There are many lending programs that have a minimum reserve requirement that must be met before your lender can even close your loan.

Yet this is where things get tricky, as there is a huge range in the amount of reserves that are needed per each loan program. For instance, usually conventional and government-insured loan programs do not have a reserve requirement. But the majority of jumbo lending programs have one and sometimes the amount of reserves required for each property that you own can be overwhelming.

Chris Salese can be reached at chris@delsurmortgage.com or (707) 363-4439. He is a licensed California mortgage banker (NMLS 254469/1850 CA BRE 01377933/01215943) and equal housing lender.


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