What Are Liquid Financial Reserves?
Liquid financial reserves are those liquid or near liquid assets that are available to a borrower after the mortgage closes. Liquid financial reserves include cash and other assets that are easily converted to cash by the borrower by
- drafting or withdrawing funds from an account,
- selling an asset,
- redeeming vested funds, or
- obtaining a loan secured by assets from a fund administrator or an insurance company.
Reserves are measured by the number of months of the qualifying payment amount for the subject mortgage (based on PITIA) that a borrower could pay using his or her financial assets. For monthly housing expense and qualifying payment requirements, see B3-6-03, Monthly Housing Expense for the Subject Property and B3-6-04, Qualifying Payment Requirements. The definition of reserves applies to both manually underwritten mortgage loans and loan casefiles underwritten through DU. Funds to close are subtracted from available assets when considering sufficient assets for reserves.
Acceptable Sources of Reserves
Examples of liquid financial assets that can be used for reserves include readily available funds in
- checking or savings accounts;
- investments in stocks, bonds, mutual funds, certificates of deposit, money market funds, and trust accounts;
- the amount vested in a retirement savings account; and
- the cash value of a vested life insurance policy
Unacceptable Sources of Reserves
The following cannot be counted as part of the borrower’s reserves:
- funds that have not been vested;
- funds that cannot be withdrawn under circumstances other than the account owner’s retirement, employment termination, or death;
- stock held in an unlisted corporation;
- non-vested stock options and non-vested restricted stock;
- personal unsecured loans;
- interested party contributions (IPCs) (see B3-4.1-02, Interested Party Contributions (IPCs)) ;
- any amount of a lender contribution (see B3-4.3-06, Grants and Lender Contributions); and
- cash proceeds from a cash-out refinance transaction on the subject property.
For additional information, see B3-4.1-01, Minimum Reserve Requirements.