Does a big reserve hurt you when refinancing?

Question

Been building up a solid maintenance reserve across my properties, feels responsible. But started wondering if having a chunk of cash sitting there, clearly earmarked for future repairs, actually helps or hurts when a lender is looking at liquidity and reserves during a refi or new purchase.

On one hand, showing reserves seems like it should read as financial discipline. On the other, if it's not liquid in the way they want to see it, or if it makes my available cash look thinner than it is, I could see it working against me.

Has anyone had a lender actually ask about how you structure your maintenance reserves, or is this a total non-issue that only matters in my head?

Erik Estrada · Answer

How do you hold your reserves now? If they are in a checking account and you can support 6 months of mortgage payments, you should be OK with most long term lenders. If they are held in stocks, bonds, etc.. then most lenders will only be able to use a percentage of the asset value as reserves.

Drew Sygit · Answer

How is lender going to know what your reserves are for?

They don't care what they are for, but you get lots of credit for having them:)

Stacy Raskin · Answer

Reserve requirements depend on your loan program guidelines. If a 1-4 unit DSCR program, what I see the most is that reserves are needed but the amount will vary. Sometimes 3 months reserves are required, some 6 months, sometimes less and some programs if you are doing a cash out refinance, the cash out refinance can be used as reserves. This will vary by lender and is usually impacted by the borrower's credit score. To verify the reserves, the underwriter will usually want to see the most recent bank statement.

Doug Smith · Answer

That helps a great deal. Many people just focus on the Collateral portion of the "C's of Credit", but I feel Capacity, meaning ability to repay is the most important C. We always look for a primary, secondary, and tertiary form of repayment. The primary is the planned activity for the loan/property such as the flip at the end or the rental income. The tertiary, or third/last resort, is the liquidation of the collateral, but the secondary form or repayment is usually the liquidity of the sponsors. Lenders like us want you to have extra liquidity/reserves. We look for that secondary form of repayment, which is that reserve. That will help you, not hurt you.