Types of Financial Reserves

The most fundamental sources of liquid financial reserves are funds held in standard depository accounts. These include readily available funds in checking accounts, savings accounts, money market funds, and certificates of deposit (CDs). To be eligible, these assets must be liquid or near-liquid, meaning the borrower can easily convert them into cash to meet financial obligations. While funds in these accounts are generally acceptable, the lender must verify that the borrower is the account holder and that the funds are not derived from unacceptable sources, such as personal unsecured loans or unverified large deposits, ensuring the borrower’s true financial stability.

Yes, investments in stocks, government bonds, and mutual funds are generally acceptable as financial reserves, provided they are vested assets. When these assets are used specifically for reserves rather than for closing costs, lenders typically assess them at 100% of their verified value, and the borrower is generally not required to liquidate them at the time of underwriting. However, there are exceptions; for example, stock held in an unlisted corporation is not an acceptable source of reserves because it is not considered easily converted to cash. The lender must verify ownership and value through recent account statements to ensure liquidity.

Vested funds in retirement savings accounts, such as 401(k) plans, IRAs, SEP, and Keogh accounts, are acceptable sources of reserves. The key requirement is that the funds must be vested, meaning the borrower has ownership rights to them. Additionally, the account must allow for withdrawals regardless of the borrower’s current employment status. Importantly, Fannie Mae does not require the borrower to actually withdraw the funds or pay any associated penalties for them to count toward the reserve requirement; the lender simply needs to verify that the funds are vested and accessible to the borrower in case of financial need.

Yes, the net proceeds available from the cash value of a vested life insurance policy can be counted toward financial reserves. This includes funds available from the surrender of the policy or a loan secured by the cash value. To use this asset, the lender must verify the actual cash value that is accessible to the borrower. However, if the borrower is using a loan against the policy to access these funds, the lender must assess repayment obligations or additional obligation considerations to determine if there is any impact on the borrower’s debt-to-income ratio or overall reserve availability.

Virtual currency, such as cryptocurrency, is not acceptable in its original form for reserves. However, it can be used if it has been exchanged into U.S. dollars. To qualify, there must be documented evidence that the virtual currency was successfully exchanged into U.S. dollars and that those funds are currently held in a U.S. or state-regulated financial institution. The verification process must demonstrate that the funds are available in U.S. dollars prior to the loan closing. Without this conversion and verification in a regulated institution, the volatility and liquidity issues of crypto make it ineligible as a reserve asset.

Funds disbursed from or held in a trust account are acceptable as reserves, provided the borrower has immediate access to them. The lender must verify this accessibility by obtaining written documentation of the trust account’s value and the conditions under which the borrower can withdraw funds. This often requires documentation from the trust manager or trustee confirming the value and the borrower’s rights to the funds. If the withdrawal of funds would negatively impact the trust income that the borrower is also using to qualify for the mortgage, the lender must analyze that impact before accepting the assets.

No, the cash proceeds derived directly from a cash-out refinance transaction on the subject property cannot be used to satisfy the minimum reserve requirements for that specific loan. Reserves must consist of liquid assets that exist and remain available to the borrower after the loan closes. Since the cash-out proceeds are a result of the new loan itself, they do not represent pre-existing liquidity or a financial safety net independent of the transaction. Borrowers must demonstrate they have sufficient other acceptable assets, such as savings or investments, to meet the reserve requirements independent of the cash-out funds.

Vested stock options are an acceptable source of reserves, whereas non-vested stock options are not. For vested stock options, the value is typically determined by the gain that would be realized from exercising the option and selling the stock at the current market price. This requires a statement listing the number of options and the option price, along with the current stock price. Conversely, non-vested stock options (and non-vested restricted stock) are considered unacceptable because the borrower does not yet have full ownership rights or the ability to convert them into cash, making them illiquid for reserve purposes.

Yes, net equity from a property that is pending sale can be counted, but specific calculations apply. The lender must calculate the net equity by taking the listing price (or sales contract price) and subtracting existing liens and estimated sales costs. If the property is pending sale but will not close before the new mortgage transaction, the lender generally estimates the net proceeds (often using 90% of the listing price minus liens). However, the actual cash proceeds must be verified if the sale closes before or simultaneously with the new transaction. Bridge loan proceeds used in these scenarios must be subtracted to avoid double counting.

Certain assets are explicitly defined as unacceptable sources of reserves because they lack liquidity or verification reliability. These include funds that have not vested; funds that cannot be withdrawn except upon death or employment termination; stock held in an unlisted corporation; non-vested stock options; and personal unsecured loans. Additionally, “cash on hand” (money not in a regulated depository account) is generally not acceptable for reserves. Interested party contributions (IPCs) and lender contributions also cannot be used to meet reserve requirements, as reserves must represent the borrower’s own financial resources remaining after the transaction is complete.