What are "reserves" and how are they used in underwriting?

• A. Reserves are funds held after closing to cover future mortgage payments or contingencies as required by the underwriter.
• B. Reserves are a kind of mortgage insurance.
• C. Reserves are the down payment.
• D. Reserves are funds for closing costs.

Answer: (A)

Reserves are funds the borrower still has in liquid assets after closing, used as a safety net to cover future mortgage payments and related housing costs if income dips or emergencies arise. In underwriting, lenders require enough reserves to cover a specified number of monthly payments of PITI (principal, interest, taxes, and insurance) or other housing obligations. This shows the borrower can continue to meet debt obligations even if cash flow changes, reducing the lender’s risk. Reserves must be readily accessible in cash or easily liquidated investments and are not spent at closing. They are not the down payment or mortgage insurance. For example, with a monthly PITI of $1,800 and a two-month reserve requirement, you’d need $3,600 available after closing.