Setting aside cash for a down payment and closing costs is an important part of preparing to buy a home, but these two expenses are not the only requirements you need to think about.

If you plan to take out a mortgage to buy a home, your lender may also want to see a healthy savings account or some other type of assets that you can use as mortgage reserves. Having financial reserves shows lenders you will be able cover your mortgage should there be any changes in your income or an emergency.

What are mortgage reserves?

Mortgage reserves are the assets, like cash, that you have easy access to if you were to need help covering your mortgage payments. These assets are what you have left over after you make a down payment and pay closing costs.

Reserves are measured in months. If you had $7,200 in a savings account after you close on your loan, for example, and your monthly mortgage payment is $1,200, you’d have six months’ reserves.

Reserves aren’t limited to cash in your bank accounts. There are other types of assets that qualify, including:

• Vested funds in retirement accounts, such as a 401(k) or IRA
• Stocks, bonds, mutual funds and money market funds
• Certificates of deposit (CDs)
• Cash value of an insurance policy
• Funds in a trust

What assets aren’t allowed as mortgage reserves?

Some examples of assets that are not allowed as mortgage reserves include:

• Funds that aren’t yet entirely vested
• Funds that can only be withdrawn upon retirement or termination of employment
• Unsecured (personal) loans
• Money obtained through a cash-out refinance

Typically, lenders like to see what’s known as liquid assets or near-liquid assets, which means the money or assets can be easily accessed if need be. This includes being able to simply withdraw the cash or write a check, or accessing the cash by redeeming it from a retirement account that is fully vested—meaning the money in the account belongs to you entirely, not to your employer.

When do you need reserves?

Most borrowers don’t need mortgage or cash reserves, unless they’re buying a certain type of property or their application could use a boost due to poor credit, a low down payment or a high debt-to-income (DTI) ratio.

Homebuyers with a credit score of 700 or lower, for instance, who are making a down payment of less than 20 percent, might need to have six months in financial reserves available to get approved.

Even homebuyers making a more substantial down payment, of as much as 25 percent, may still need to have mortgage reserves if their credit score is in the 600s. In such cases, you might need enough cash reserves to cover anywhere from two to six months of mortgage payments.

If you’re an investor or self-employed, you might need to have reserves, as well.

In general, though, reserves are smart to have in case of an emergency, such as a job loss, because they help substitute for lost income.

“I generally tell people to have at least six months of mortgage payments in the bank,” says Scott Sheldon, branch manager at New American Funding in Santa Rosa, California. “This can be money that’s cumulative across their bank, stocks, bonds and even IRA funds.”

Mortgage reserve requirements by loan type

Conventional loan 0-6 months, depending on credit and DTI/LTV ratios FHA loan 3 months for 3- or 4-unit properties VA loan 6 months for 3- or 4-unit properties USDA loan No requirement

Mortgage reserve requirements by property type

Primary residence 2-6 months Second home 2 – 4 months Investment property 6+ months

“Multi-unit properties require more reserves as do investment properties,” says John Stearns, mortgage banker at American Fidelity Mortgage in Milwaukee, Wisconsin. “The reserves will be based on how much borrowers owe on these investment properties.”

How to build your mortgage reserves

1. Cut down on spending

Look at your budget and see if you can cut back spending anywhere. You can cancel some subscription-based services you don’t use a lot, for example, shop smarter at the grocery store or find a cheaper provider for your car insurance.

2. Set aside a portion of income

Since your savings accounts qualify as reserves, you can augment these by putting aside some of your income in these accounts each month. Consider setting up automatic deposits to make it even easier to stash money away.

3. Consider a CD

If the interest rate on your savings account isn’t cutting it and you’re several months away from getting a mortgage, consider a certificate of deposit (CD). CDs are an acceptable reserve asset, and CD rates tend to be higher than savings account rates, giving you a better return.

4. Find a side gig

Finding a side hustle that interests you can help you accumulate savings quickly. Some of the top side hustles include selling items through online marketplaces, tutoring, freelance writing and working as a ride hail driver.

5. Increase contributions to your retirement account

Vested money in 401(k) funds is an acceptable form of mortgage reserves. If you’re only contributing the minimum to your retirement accounts, consider an increase. This is particularly important if your employer provides matching contributions. At the very least, you should contribute enough to max out your employer matching funds, which will help increase your retirement fund more quickly.

6. Save money from windfalls

If your job provides regular bonuses or you typically get a sizable refund from the IRS each year, make it a habit to set some of that money aside for cash reserves.