Reserves are best described as: Additional liquid assets kept after closing to cover several months of payments.

• A. Additional liquid assets kept after closing to cover several months of payments
• B. Funds set aside to pay closing costs only
• C. Insurance premiums financed into loan
• D. Down payment funds

Answer: (A)

Reserves are funds a borrower must keep after closing as a cushion to cover several months of mortgage payments. These are liquid assets that stay available after closing to ensure you can continue making payments if income dips or unexpected costs arise. Lenders state the required amount in terms of months of total housing expenses (PITI: principal, interest, taxes, and insurance), and the exact number of months depends on factors like loan type, occupancy, and credit risk.

For example, if your monthly PITI is $2,500 and the lender requires six months of reserves, you’d need $15,000 set aside after closing. This money isn’t spent at closing, nor is it part of the down payment. It’s separate from funds used to cover closing costs and isn’t something you finance into the loan. By contrast, down payment funds reduce the loan amount, and insurance premiums financed into the loan would be paid monthly as part of PITI or via escrow, not held as reserves.