Reserve Requirements for Manually Underwritten Loan

Liquid financial reserves refer to the liquid or near-liquid assets that a borrower retains after the mortgage loan has closed. These funds serve as a financial buffer to help the borrower manage monthly housing expenses or unexpected financial setbacks. To qualify as reserves, the assets must be easily convertible into cash. This generally involves the ability to withdraw funds from an account, sell an asset, redeem vested funds, or obtain a loan secured by an asset (such as a 401(k) loan) without facing restrictions that would prevent immediate access to the money.

Lenders accept several types of liquid assets to satisfy reserve requirements. Acceptable sources commonly include funds held in checking or savings accounts, certificates of deposit (CDs), and money market funds. Investments in stocks, bonds, and mutual funds are also permitted, typically at 100% of their value for reserve purposes. Additionally, the vested amount in retirement savings accounts (like a 401(k) or IRA) and the cash value of a vested life insurance policy are valid sources. Trust accounts may also be used if the borrower has immediate access to the funds.

Yes, certain assets are ineligible for use as reserves because they are not considered sufficiently liquid or stable. Unacceptable sources include funds that have not yet vested, or funds that cannot be withdrawn except upon the account owner’s retirement, employment termination, or death. Other prohibited assets include stock held in an unlisted corporation, non-vested stock options, and non-vested restricted stock. Furthermore, interested party contributions (IPCs), lender contributions, and personal unsecured loans cannot be counted toward the borrower’s reserve requirements for the transaction.

No, the cash proceeds derived from the cash-out refinance transaction itself cannot be used to meet the minimum reserve requirements for that specific loan. Under Fannie Mae guidelines, the borrower must demonstrate that they have sufficient liquid assets available from other eligible sources to satisfy the reserve requirements. The funds designated as reserves must be distinct from the equity being liquidated from the subject property during the refinance process. This rule ensures the borrower has independent financial stability beyond the transaction proceeds.

For manually underwritten loans involving borrowers without a credit score who rely on nontraditional credit, reserve requirements depend on the borrower’s housing payment history. If at least one borrower on the loan can document a housing payment history (such as rent) as a nontraditional credit reference, there is no minimum reserve requirement mandated by the guidelines. However, if no borrower can provide a documented housing payment history, the lender requires a minimum of 12 months of financial reserves. This stricter requirement compensates for the lack of a demonstrated track record in managing housing payments.

If a borrower owns multiple financed properties, they must hold additional reserves based on the aggregate unpaid principal balance (UPB) of the mortgages and HELOCs on those other properties. For manually underwritten loans, if the borrower has one to four financed properties (excluding the subject property and principal residence), they generally need reserves equal to 2% of the aggregate UPB of those other properties. If the borrower has five to six financed properties, the requirement increases to 4% of the aggregate UPB. These reserves are in addition to the specific requirements for the subject property itself.

Yes, eligible gift funds may be used to meet financial reserve requirements for manually underwritten loans, provided they come from an acceptable donor. Acceptable donors typically include relatives or individuals with a familial relationship, such as a fiancé or domestic partner. However, a “gift of equity” (a reduction in sales price provided by the seller as a gift) cannot be used to satisfy reserve requirements. The lender must document the transfer of the gift funds and verify that they are available to the borrower for use as reserves.

When stocks, bonds, and mutual funds are used to satisfy reserve requirements, lenders are generally permitted to consider 100% of the asset’s value. Unlike when these assets are used for a down payment or closing costs—where the borrower might need to liquidate them or prove receipt of funds—reserves do not necessarily require liquidation. Therefore, the lender verifies the value of these vested assets through monthly or quarterly statements. The full verified value of these investment accounts is typically eligible to count toward the borrower’s required liquid financial reserves.

If a lender is processing multiple mortgage applications for second homes or investment properties for the same borrower simultaneously, the borrower does not need to hold separate, cumulative reserves for each application. The same pool of assets may be used to satisfy the reserve requirements for both mortgage applications. For example, if one application requires $5,000 in reserves and another requires $10,000, the borrower needs to verify only $10,000 in total reserves (assuming it covers the higher requirement), rather than $15,000. This policy recognizes that reserves are a safety net rather than funds spent at closing.

Yes, borrowed funds secured by a financial asset, such as a loan against a 401(k) account, life insurance policy, or certificate of deposit, are acceptable sources for reserves. However, if the borrower uses the financial asset itself (e.g., the 401(k) balance) to meet reserve requirements, the value of that asset must be reduced by the amount of the secured loan proceeds and any related fees. Essentially, the lender counts the net value of the asset or the cash proceeds from the secured loan, ensuring the same funds are not double-counted.