Income
Cash Reserves: Definition & Example
Also called: Reserves
What Is Cash Reserves?
Cash reserves are liquid funds a borrower or business still has available after a transaction closes, often measured in months of housing payments or operating expenses.
What does cash reserves mean?
Mortgage lenders often require reserves equal to a certain number of monthly housing payments, such as two, six, or twelve months, after the down payment and closing costs are paid. Requirements rise with loan risk, such as for investment properties, multi-unit homes, or borrowers with several financed properties.
Reserves typically include checking, savings, money market, and brokerage balances, and sometimes a discounted share of retirement accounts. Borrowed funds and gifts may not count, depending on the program.
For businesses and landlords, cash reserves are funds set aside for vacancies, repairs, and emergencies, commonly three to six months of operating expenses.
Cash reserves example
An investor buying a duplex has a projected mortgage payment of $2,600 including taxes and insurance, and the lender requires six months of reserves, or $15,600. After closing, the investor will still have $21,000 in savings and brokerage accounts, which meets the requirement.
Related terms
- Liquid AssetsLiquid assets are cash and other holdings that can be quickly converted to cash without significant loss of value, such as checking, savings, money market accounts, and publicly traded securities.
- Proof of FundsProof of funds is documentation showing that a person or business has enough money available for a purchase or investment, usually a recent bank or brokerage statement or a bank letter.
- Compensating FactorsCompensating factors are strengths in an application, such as large savings, long job history, or low payment shock, that can offset a weakness like a high debt-to-income ratio or thin credit.
- Verification of DepositVerification of deposit (VOD) is a form, commonly used in mortgage lending, in which a bank confirms an applicant’s account details, current balance, and average balance.
- Average Daily BalanceAverage daily balance is the average amount of money in an account across every day of a period, calculated by adding each day’s ending balance and dividing by the number of days.
