Reader question: “We recently got turned down by a mortgage lender because they said we had insufficient cash reserves. I wasn’t even aware of this requirement when we applied for the loan, since nobody said anything about it at the time. Other than that, we are totally qualified for a home loan. Solid credit, a long history of paying bills, good income, etc. Is there a mortgage lender who will do a home loan with no cash-reserve requirements? Or is this a standard requirement across the industry.”
The short answer is yes, there are mortgage lenders out there that do not require borrowers to have cash reserves. There are also lenders with stricter requirements of up to six months’ cash reserves, or even 12+ months for jumbo loans. And finally, there are some companies in the middle, requiring borrowers to have one or two months worth of mortgage payments in the bank prior to closing. So it’s a broad spectrum.
Before we go any further, let me explain what cash reserves are and why some lenders require them.
Definition of Cash Reserves, in a Mortgage Context
When mortgage lenders mention cash reserves, they are talking about extra money the borrower has in the bank at the time of underwriting and closing. The amount is typically expressed in terms of monthly mortgage payments. For instance, a lender might require borrowers to have three months worth of payments in the bank at closing. This is above and beyond the amount required for the down payment and closing costs, by the way. It’s extra money kept in reserve to cover the monthly payments – hence the term.
Why do some lenders have cash-reserve requirements? In a word, risk. When borrowers have additional money saved up, they are less likely to miss their mortgage payments – at least the first few payments. They are mostly concerned about your payment ability in the short term, versus the long term. Here’s why…
Your lender may not keep your loan on its books for very long. They might sell it into the secondary market through Freddie Mac and/or Fannie Mae (the government sponsored enterprises, or GSEs, that buy and sell bundled loans). You’ve probably heard about mortgage-backed securities, or MBS. That’s what they are. They are bundled securities that are backed by mortgages, and then sold and resold to investors through Wall Street.
Some Lenders Require Them, Some Don’t
Cash reserves or not an industry standard or a GSE requirement. They vary from lender to lender. Some require them while others don’t. There are even variations among those that do require them. For instance, some lenders might have a requirement of two months’ cash reserves, while another has a more stringent six-month requirement. It varies widely.
The standards can also be applied differently for different borrowers, based on the borrower’s qualifications:
- If you have excellent credit, a low debt-to-income ratio, and a large down payment, you’re less likely to be slapped with a cash-reserve requirement. You are a well-qualified borrower with a history of repaying your debt obligations on time and in full. You are a low-risk borrower.
- If you have a marginal credit score (perhaps with a few late payments or defaults in the past), a higher debt ratio, and a smaller down payment, you are more likely to encounter a cash-reserve requirement. The lender will view you as a higher risk, and will take measures to minimize their exposure – such as requiring more money in the bank at closing.
Almost all jumbo loans (above conforming loan limits) have significant cash-reserve requirements. I’m not sure if you fall into this category or not. You didn’t say how big your loan will be. A MarketWatch article from earlier this year revealed that most lenders are requiring at least 12 months worth of cash reserves for jumbo loans.
(Definition: “Jumbo” means that the loan exceeds the conforming limits established by the two GSEs mentioned earlier, Fannie Mae and Freddie Mac.)
My advice is to apply with another lender. You don’t have much to lose by doing that. But before you submit an application, ask them about their cash-reserve requirements. Tell them you’ve been denied for this reason before, and you don’t want to go down that road again. Ask the loan officer who actually works for the bank or lender — not the broker.
Do you belong to a credit union? If so, you should ask them about their mortgage options. Credit unions often have less strict criteria for their members.
As a general rule, the larger banks (Wells Fargo, BOA, etc.) typically have stricter requirements than community banks or state/regional lenders. So cast your net far and wide.
Disclaimer: This article answers the question, Are there any lenders that don’t require cash reserves? Bear in mind that mortgage lending can be a highly individualized process. Some borrowers encounter stiffer requirements as a result of having a higher risk profile, as measured by credit scores, down payments, etc. Every lending scenario is different.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author