What Are Cash Reserves and Why Do You Need Them?

Written by Posted On Thursday, 07 March 2024 00:00

When people talk about closing costs, it typically means the direct costs of getting a new mortgage. But there are two primary types of closing costs, often times referred to as recurring and non-recurring charges. Recurring charges include things that will happen again and again as one owns the home. What might they be? Recurring charges are things such as property insurance, interest and property taxes. Those will come due each and every year.

Non-recurring closing costs are one-time fees. The fees you’ll see on your settlement statement. These ‘one-offs’ are items such as a property appraisal fee, lender charges and other third party services such as attorney fees. These are one-time charges associated with your closing your loan.

These fees are all added together to arrive at a ‘cash to close’ amount. This of course means including your downpayment. When lenders ask for your bank or investment statements from the accounts you’re using to close your transaction, they make sure you have enough funds available that belong to you to pay everyone what they’re asking for. This also includes a ‘non-cash’ item that you don’t have to shell out any money for but you need to have them instead. These funds are referred to as ‘cash reserves.’ What are cash reserves?

Cash reserves are funds left over after the closing has taken place. This means some extra, liquid cash on hand available to you. Okay, so how much do cash reserves cost?

Cash reserves aren’t really a charge, you’ll keep the money in your bank account but lenders still ask that you have them. How much? Reserves are typically grouped into a month or two of mortgage payments. These payments include not just the principal and interest charges but also a monthly amount for the annual property tax and homeowner’s insurance tab. If the principal and interest payment is $2,000 and 1/12th of the property tax bill is $200 and insurance $100, then the total payment is then $2,300. If a lender’s loan guidelines ask for two months of reserves, there needs to be about $4,600 left over.

Why? Primarily because lenders don’t want you to go flat broke after a closing. Lenders know you can’t wait to start decorating your house with your new stuff so there needs to be some funds left. Again, cash reserves aren’t an out-of-pocket expense, but you do need to show that you have them.

Rate this item
(0 votes)
David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

Realty Times

From buying and selling advice for consumers to money-making tips for Agents, our content, updated daily, has made Realty Times® a must-read, and see, for anyone involved in Real Estate.