Real Estate

What Are Cash Reserves And Why You Need Them To Buy A Home

If you’re looking to buy a home, you probably already know that you’ll need to have some money in the bank in order to make it happen. However, you may need more than you’d initially expect.

In addition to the funds you’ll need for your down payment and closing costs, banks look for you to have a certain amount of money in cash reserves in order to by a home. Keep reading to learn more about what cash reserves are and how they affect your transaction.

What are cash reserves?

Put simply, the term “cash reserves” refers to any liquid assets you have leftover after paying your down payment and closing costs. Your liquid assets include any funds that can be quickly turned into cash, if needed. These can be funds in a checking and savings account, most investments, or retirement accounts.

Cash reserves are typically expressed in how many months worth of mortgage payments that can be made using those funds. Each mortgage payment includes the principal loan amount, interest, association fees (if applicable), property taxes, homeowner’s insurance, and mortgage insurance (if applicable).

Why are cash reserves important?

At its core, having money leftover after buying a house benefits you, as the buyer, because there are often additional costs to consider, such as needing to buy furniture or make repairs. It’s also beneficial to have some savings in place in case something unexpected happens, such as a job loss or medical emergency.

However, from the bank’s perspective, the fact that you have some extra funds at your disposal provides them with added reassurance. In truth, they’re taking a risk in lending you enough money to buy a home. Cash reserves show them that you’ll still have the ability to keep up with your mortgage payments, even if something happens to your regular paycheck.

How much cash do you need to have in reserve when buying a home?

The amount of cash reserves that you need to have in the bank varies depending on the type of property you’re buying and the loan program you’re using. You’ll also want to be sure to also ask your lender about their specific requirements. However, you use the following to give you a general idea of how much you need to save.

  • FHA Loan: 3 months
  • Conventional: 0-6 months
  • VA and USDA: No requirement

Keep in mind, however, that if you’re buying the home as an investor, the requirements will likely be more stringent. In that case, the lender will want to be doubly reassured that you’re able to carry the investment property in addition to any existing debt for your primary residence.

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