The Importance of Reserves for HELOC Qualification

When applying for a mortgage, part of your ability to buy a home is based on the reserves you have on hand – or the funds you have saved that will help you meet your mortgage obligation even if something unexpected comes up in your life or finances. Just like in a business, cash reserves are funds you set aside for emergencies. It’s one more assurance your lender has that you can make your payments each month. For example, for most mortgages, 2 to 6 months of seasoned assets are required. And a home equity line of credit (HELOC) is similar. Like mortgages, you need reserves for HELOC qualification.

For most mortgages, two months of seasoned assets are required. You might be wondering what “seasoned” means. Here’s how it works. Banks and other lenders want to make sure the money you have saved in your account is actually yours. It can’t be an undisclosed loan or money lent or gifted to you by a friend or family member. That’s why they ask for you to provide at least two months of bank statements. And, there are acceptable sources of reserves. These include readily available funds in a checking or savings account, investments in stocks, bonds, mutual funds, money market funds, trust accounts, vested retirement savings, and the cash value of a vested life insurance policy.

You Need Reserves for HELOC Qualification – Just Not the Wrong Kind

Unacceptable sources of reserves for HELOC qualification typically include funds that aren’t vested or can’t be withdrawn from retirement accounts without specific conditions, non-vested or restricted stock options or unsecured loans.

With a HELOC, your home serves as collateral. However, most lenders require that you own your home for a certain period of time – usually around 12 months – before you’ll be able to refinance to a first-lien home equity line of credit. When it comes to reserves for HELOC qualification, every lender is different. But in most cases, the amount of reserves you have on hand is up to you. That said, your home is likely your most valuable asset. For that reason, it’s important to take necessary precautions to protect your investments and financial security.

A typical reserve requirement for a mortgage is 2 to 6 months. That means you have the resources to cover two months of housing expenses. These expenses include your payment, interest, taxes and any insurance. It’s also a good idea to have savings that will cover other needs like groceries, utility and phone bills and daily living expenses. That amount will look different for every person and every situation. For that reason, having adequate funds on hand will help you have greater peace of mind. The important thing to remember is that proper planning, saving and strategizing will help you in a big way. You could pay off your mortgage quicker, have more money for retirement or help you meet other personal goals sooner than you ever thought possible.

A home equity line of credit is a powerful financial vehicle. If you use it strategically, you could be debt-free sooner than you think. Click here to see if you’re a good candidate for this approach.