Buying overview -> Down payment and reserves

Down payment and reserves

How a lender looks at your assets determines how much can be used
for down payment and how much will count as ‘reserves’ after close of escrow.

Lenders and lending programs vary in terms of how they assess your assets. Some require you to have a certain amount of cash and/or retirement funds on hand after close, called reserves, whereas others do not.


  • Liquid assets: cash, savings, stocks, bonds and mutual funds
  • Net proceeds from sale of current residence
  • IRA, Keogh, 401k, pension, or other retirement savings
  • Gift money that you will be receiving
  • Any business funds, loans or bridge financing you will be using

You can use the Borrower Information worksheet in the Shopping Toolkit to aggregate your information.


Asset Verification

Verifying assets is more rigorous since the financial crisis. You will need to provide the two most recent statements on your asset accounts, including retirement. Any deposits on those two statements that exceed 25% of your monthly income will have to be documented and explained. If you sold a car on craigslist for example, you will need to provide a copy of the ad and a bill of sale. If you have received funds that cannot be explained or are not acceptable to the lender, you cannot use those funds for your down payment or reserves.

Some of the more common issues around assets include: a gift from someone who is not a relative, or from someone who does not want to provide a gift letter and gift verification; large wedding gifts; large cash deposits from any source that cannot be paper-trailed. Be aware that you will have to provide evidence of liquidation of stocks/bonds/mutual funds if those funds are needed to close; same with money from a retirement account. You cannot parachute undocumented liquid funds into your asset account at the eleventh hour because you will likely be required to provide a screen shot of your asset account balances and transactions just before close of escrow. Any large deposits that show up on the screen shot and made after your last statement will have to be explained.

Only deposits which appear on the two most recent, consecutive statements you provide to the lender have to be verified. Funds that were in your account prior to the two most recent statements do not have to be verified, regardless of the source.

Use of Retirement Funds

A ‘first-time’ homebuyer, defined in this case as one who has not owned a home in the previous two years, can take up to $10,000 (a lifetime limit) out of an IRA or SEP IRA, without paying the 10% withdrawal penalty, for the purchase of a primary residence. The income tax on that withdrawal does have to be paid with your next tax filing. You have 120 days to close after withdrawing the money or the 10% penalty will apply. These same rules apply if a child or spouse of the owner of an IRA is a first-time homebuyer.

You can also take money out of an IRA without paying tax or penalty if the funds are put back in the IRA within 60 days; this is called a ‘rollover’.

It is often possible to borrow up to 50% of the funds in your 401k for a down payment; then, you simply pay yourself back, with interest, over time. Contact your plan administrator for the specific rules that apply.

It is always good to speak to a CPA or your financial advisor before using retirement funds.

Use of Business Funds

If you are going to use business funds as part of your down payment, let your lender know at the beginning of the process – even if you are a 100% owner of the business. Different lenders and loan programs have very different guidelines and restriction around the use of business funds. Rules may differ depending on whether the business is a sole-proprietorship, a partnership, an S corporation, or a ‘C’ corporation, and on the percentage ownership of the borrower.


Most jumbo loan programs require you to have some money left in reserve after the purchase. Depending on the lender and the loan program, reserve requirements are based on one of three criteria:

  • Your total monthly housing expense (mortgage, taxes, and insurance)
  • Your total monthly debt—total monthly housing expense combined with your total monthly consumer debt (credit card bills, car payment, installment loans, student loans, etc.)
  • Your total monthly income

Whichever of the three criteria the lender uses, you will be required to have a certain number of months in reserve. Lenders generally only count a portion of the value of your retirement assets toward reserves. You may be able to use gift funds to meet the lender reserve requirement, check with your lender.

Reserve requirements can vary greatly from lender to lender. If necessary for your situation, a good mortgage broker may be able to find you a loan program that is flexible on the amount of reserves you will need.

Consider your closing costs

Again, your reserves are the liquid assets that you have left after your down payment and closing costs. In figuring your reserves, it is important to receive from your lender a detailed estimate of your closing costs early in the transaction. Closing costs include title, escrow, recording fees and the loan fees, including any origination points and appraisal. Many lenders have a pricing incentive for borrowers who pay their property taxes and homeowner’s insurance each month with their mortgage payment; this is called an impound account. If you choose to have impounds, you will have to fund this account at close of escrow, which can increase your closing costs, often by thousands of dollars. If you are considering impounds, ask your lender about this.

You may be able to finance a substantial portion of your closing costs by negotiating to have the seller give you a credit for some or all of your closing costs in lieu of a price reduction.

For example, you may have had an offer accepted at $693,000 for a home listed for $700,000. With a 10% down payment of $69,300 and total closing costs of $10,000, you would have to come up with about $80,000 to close. If, however, you paid $700,000 for the house and got the seller to credit you $7,000 for the closing costs, you would only need about $73,000 to close. Your mortgage would be $7,000 higher—so you are financing your closing costs—but you would not have used up as much of your cash reserves. Of course, the house will have to appraise at the slightly higher purchase price.