What are cash reserves post-closing in mortgage underwriting used for?

• A. Liquid assets sufficient to cover several months of housing costs if income fluctuates.
• B. The total loan-to-value ratio used to determine risk.
• C. The appraised value of the property.
• D. The required debt-to-income ratio for underwriting.

Answer: (A)

Cash reserves after closing are the borrower’s liquid assets set aside to cover housing costs for a period after closing if income fluctuates. Lenders want this cushion because it demonstrates the borrower has funds available to continue making payments even during temporary income gaps, reducing default risk. The reserves are usually expressed as a number of months of housing costs (PITI), and the required amount depends on the loan type, program, and risk profile. For example, a borrower might be required to show several months’ worth of PITI in readily accessible accounts.

These reserves aren’t used to determine the loan-to-value ratio, which compares the loan amount to the property's appraised value, nor do they set the appraised value itself, or the debt-to-income ratio, which compares monthly debts to gross income. Instead, they provide a post-closing liquidity buffer to help ensure the loan can be serviced even if income dips.