Bank Statement Loans Reserve Requirements
Bank Statement Loans Reserve Requirements
Definition and Calculation Methodology
Reserve Requirements are an important underwriting factor that help lenders assess a borrower’s financial stability. Reserves are defined as liquid assets that remain available to the borrower(s) after the down payment and all closing costs have been satisfied. The purpose of reserves is to provide a financial safety net in case of income interruption. Bank Statement Loan Reserve Requirements vary based on loan amounts, loan to value and credit scores.
A. Calculation of Reserve Amount
Reserves are calculated based on the borrower’s monthly housing expense.
- Standard Reserve Unit: Reserves are measured by the number of months of monthly housing expense (PITIA) that a borrower could cover using their financial assets.
- PITIA Components: PITIA includes the Principal, Interest, Real Estate Taxes, Homeowner’s Insurance (Hazard/Flood), Ground Rent, Special Assessments, Association Dues, and payments for Subordinate Financing secured by the subject property.
- Interest-Only (IO) Loans: For BSLs structured as Interest-Only (IO) loans, the reserves are calculated off the initial Interest-Only payment plus Taxes, Insurance, and HOA fees (ITIA).
Standard Reserve Matrix for Bank Statement Loans (Alt Doc)
The minimum reserve requirement for Bank Statement Loans typically varies based on the total loan amount and is often higher than Full Documentation loans due to the non-traditional income verification.
A. Connect and Edge Standard (Alt Doc)
The baseline requirement for many Alt Doc loans, including BSLs, is six months of PITIA:
| Program | Loan Amount Threshold | Minimum Reserve Requirement |
| Edge Standard (Alt Doc) | All loans | 6 months (PITIA/ITIA) |
| Connect (Alt Doc) | Loan amount up to $1.5MM | 6 months PITIA |
B. Tiered Requirements (Horizon, Sharp, Prime NQM)
For larger loan amounts across various Non-QM series (including Sharp and Horizon), the required reserves increase significantly:
| Loan Amount | Sharp Standard/Expanded Reserve | Horizon Expanded Reserve | Prime NQM Reserve |
| <=$500,000 | 3 months | 3 months PITIA (?80% LTV) | 3 months |
| $500,001-$1,000,000 | 3 months | 6 months PITIA | 6 months |
| $1,000,001-$1,500,000 | 6 months | 6 months PITIA | 6 months |
| $1,500,001-$2,000,000 | 6 months | 9 months PITIA | 9 months |
| >$2,000,000 | 9 months (up to $3MM) | 12 months PITIA (up to $3.5MM) | 9-12 months |
Special Conditions and Exceptions
A. Exceptions to Reserve Requirements
- Rate/Term Refinance: Reserves are generally not required for Rate/Term Refinance transactions where the maximum CLTV is ?60% and the borrower has a minimum housing history of 0x30x12 (no 30-day late payments in the last 12 months).
- Asset Utilization as Sole Income: When a borrower utilizes an Asset Utilization program (a form of Alt Doc) as the sole source of qualifying income, reserves are generally not required.
- Loans Secured by Financial Assets: Payments on loans secured by a borrower’s liquid financial assets (e.g., 401(k) or life insurance policies) can be excluded from the DTI calculation if the asset is collateral for the loan. However, the value of the asset must be reduced by the secured loan amount when calculating the borrower’s remaining reserves.
B. Reserves for Additional Properties
For the Sharp Expanded, Sharp Premium, and Sharp Standard programs, borrowers who have additional financed properties (other than the subject property) must meet the subject property reserve requirement plus two months of reserves for each additional financed property. This additional requirement is capped at a total of 12 months reserves for all properties (including the subject property).
Eligible Assets and Documentation
Reserves must be documented assets that are liquid or easily convertible to cash.
Asset Type | Percentage Used for Reserves | Notes |
Depository Accounts | 100% | Checking, Savings, Money Market, CDs |
Marketable Securities | 80% (Advantage) or 100% (Edge/Sharp/Connect) | Stocks, bonds, mutual funds |
Retirement Accounts | 70% (if < 59 ½) / 80% (if ?59 ½) | Must be vested funds and generally require reduction for any outstanding loans. Some programs allow 100% of vested value for reserves. |
Cash-Out Proceeds | 100% | Net proceeds from a cash-out refinance transaction can be used to meet the reserve requirement. |
Cryptocurrency | 50% (unliquidated Bitcoin/Ethereum for Reserves) | Bitcoin and Ethereum are allowed for reserves but must be discounted to 50% of value due to volatility. If used for closing costs, it must be liquidated to U.S. dollars. |
Business Assets | Ownership Percentage | Business accounts may be used if the borrower has 100% ownership of the business across all borrowers, or if non-owner partners provide an access letter. A cash flow analysis may be required to confirm withdrawal will not negatively impact the business. |
C. Documentation Requirements
Assets used for reserves must be verified with account statements for the most recent two months and reflect a consecutive 60 days of asset verification. Asset statements are generally valid for 120 days.
D. Ineligible Funds/Assets
The following funds are generally ineligible for satisfying reserve requirements for BSLs/Alt Doc programs:
- Gift Funds: Gift funds are generally not permitted to be used to meet reserve requirements.
- Restricted Stock: Restricted stock is ineligible to be used for reserves.
- Income-Generating Assets: Assets being used for dividend and interest income may not be simultaneously used to meet reserve requirements.
- 1031 Exchange Funds: These funds cannot be used towards reserves.
- Foreign Assets: If foreign assets are used for reserves, they may be required to be transferred to a U.S. Bank account in some programs, though some programs allow them to remain held abroad in an approved institution.
FAQ's
The monthly payment for a loan secured by a financial asset does not have to be included in the DTI ratio. However, if that same asset is used for reserves, its value must be reduced by the amount of the secured loan balance to determine the borrower’s remaining sufficient reserves.
Assets used for reserves must be verified with account statements for the most recent 2 months and must reflect a consecutive 60 days of asset verification. Asset documentation may not be older than 120 days prior to the note date.
For borrowers who are not yet of retirement age (under 59 ½), 70% of the vested amount (minus any outstanding loans) may be counted toward Reserves. If the borrower is of retirement age (59 ½ or older), 80% or 100% of the vested value may be used.
No. Gift funds may not be used to meet the reserve requirements for Bank Statement Loans.
Yes, some programs require the borrower to meet the subject property reserve requirement plus two months of reserves for each additional financed property. This additional reserve requirement is typically capped at a total of 12 months for all properties (including the subject property).
Yes, Cash-Out proceeds from the subject property refinance can be used to satisfy the post-closing reserve requirement.
Reserve requirements increase as the loan amount increases. For instance, for loan amounts exceeding $1,500,000 up to $2,000,000, 9 months of reserves may be required, and for loans above $2,500,000 up to $3,500,000, 12 months of PITIA reserves may be required.
For Alt Doc (Bank Statement, P&L, and WVOE) loans under programs like Edge Standard, the minimum reserve requirement is typically 6 months of PITIA. For loan amounts up to $1.5MM in the Connect program, 6 months of PITIA is required.
Reserves are measured by the number of months of the monthly housing expense, known as PITIA (Principal, Interest, Taxes, Insurance, and Association Dues/Special Assessments), that the borrower could cover using their financial assets.
Reserves are liquid assets that remain available to the borrower(s) post-closing of the mortgage loan, after the down payment and all closing costs have been satisfied.
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