A cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.
The reserves can come from any seasoned source. A 401k plan, savings accounts, sale from title property & stocks and bonds can all be used for reserves. The reserves are not held by the lender but rather it shows that you are able to make a payment if you suffer some type of hardship.
A loan underwriter will commonly ask for source and seasoning on the cash reserves. The source means where the reserves are located (bank account numbers, etc.) and the seasoning refers what period of time the borrower has had the assets.
First time home buyers will usually be required to have more in reserves than someone with a solid mortgage history. For example a first time home buyer in some instances might need 6 months PITI, depending on the risk, where another person might only need 2 months.
The more money you have in reserves the less risk a borrower is considered.
Depending on the loan program the amount of reserves you have can actually help you obtain more favorable terms.
Some lenders do not require cash reserves, and some require up to 12 months of your monthly payment to be reserved. Your mortgage broker will be able to determine the best lender to choose based on the reserves you have available.
Most conforming lenders will only require 2 months reserves but may require more if you are a higher risk. If you have a lot of reserves, an underwriter may make an exception to your file if, for example, your debt ratio is a little high but you have a lot of reserves they will approve your file.
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