Understanding Reserve Requirements Across Non-QM Loan Programs

An operating guide for mortgage brokers to package stronger files using clear reserve strategies

Search intent and audience

This guide equips mortgage brokers and loan officers who package Non QM scenarios for self employed borrowers, investors, and foreign nationals. Readers want a practical framework to measure, document, and present reserves in a way that earns approvals, protects pricing, and shortens underwriting cycles. You will learn how investors calculate months of coverage, which assets count, what to avoid, and how to position reserves as a strategic lever rather than a last minute hurdle.

What reserves mean in Non QM

In Non QM, reserves are liquid or near liquid assets that remain after closing. They are measured in months of PITIA. PITIA means principal, interest, taxes, insurance, and any association dues. Reserves are entirely separate from funds to close. They are never double counted with income methods like bank statements or asset utilization. When a credit decision references six months of reserves, it means six months of the property’s monthly PITIA amount, accessible from eligible accounts that will still be there after the wire lands and the recording posts.

Why this matters is simple. Reserves buy time. They let a business absorb a soft quarter or an unexpected expense without missing payments. Investors price for risk and value the ability to carry the payment. Treating reserves as a first class citizens in your intake and packaging will improve pull through and often the rate sheet you can lock.

How investors calculate months of PITIA

Start with a realistic monthly payment. Take the final loan structure and calculate principal and interest. Add property taxes and homeowners insurance. If the property is a condo or part of a planned development, add association dues. If the geography requires wind or flood coverage, include those premiums. Divide annual taxes and insurance by twelve to produce the monthly equivalents. The sum is PITIA.

Now measure coverage. If PITIA is 3,600 dollars per month and eligible liquid balances that remain after closing total 57,600 dollars, then you have sixteen months of reserves. If a program asks for nine months, you exceed it and can often trade the overage for a better price or higher leverage elsewhere in the matrix. Be explicit in your cover memo. State the monthly PITIA, list the accounts, and show the arithmetic that proves how many months are available after funds to close.

Eligible assets that typically count

Most investors accept ordinary checking and savings accounts with current statements. Brokerage accounts typically count at market value less any margin debit. Retirement accounts count on an access based basis. That means a haircut or restriction is applied if the borrower is younger than the plan’s distribution threshold or if the plan imposes penalties or loan limits. Money market funds and short duration bond funds usually qualify. Vested stock that is freely tradeable can count with proof of vesting and no lock up. Certificates of deposit count at face value if there are no punitive restrictions or if the borrower can break the CD with minimal penalty. For all categories, the test is the same. Can the borrower reasonably access the funds to make payments if cash flow wobbles.

Documentation is straightforward. Provide the most recent statement that shows the owner name, account number, balance, and positions. If the statement is older than forty five days, include a transaction history or current screen capture that shows an updated balance. If retirement access depends on age or plan rules, include the plan summary that proves access. If an account is joint, include a brief note on allocation and provide evidence that the co owner is the borrower’s spouse or domestic partner when applicable.

Assets that rarely count or require caution

Some assets present valuation or access risk. Lines of credit are not reserves because they are borrowed funds. Employer stock that is unvested or subject to trading windows is not reliable. Highly volatile assets like cryptocurrency are often excluded or haircut to a fraction of current value. Collectibles or private company shares are difficult to verify quickly and often do not count. Business accounts can count only when control and non reliance are proven, because the investor must be confident that using those funds will not harm the business that generates income.

If you believe a less typical asset should count, treat it as a bonus rather than a core pillar. Present the standard reserve stack first. Then add a brief note that documents the additional asset and why access is real. Conservatism protects your lock and your timeline.

Sourcing, seasoning, and AML visibility

Underwriting cares about where reserves came from. If balances grew rapidly in the last two to three months, be ready to show the source. Seasoning means funds have been on hand for a reasonable period, often two months, although policies vary. Anti money laundering checks require visibility for large or unusual transfers. If a liquidity event funded a reserve account, include statements that connect the dots. For example, if a brokerage account shows a 150,000 dollar increase, provide the trade confirms that show the securities sale and the date. If a business distributed capital to the owner, provide the distribution ledger and the entity governing document that allows such distributions. Clear sourcing prevents last minute conditions that delay closing.

Bank statement loans and reserve expectations

Bank statement underwriting translates deposits into qualifying income. Because income is derived from bank activity rather than tax returns, investors lean on reserves to backstop variability. Twelve months of statements may be acceptable for stable profiles with straightforward revenue. Twenty four months can smooth seasonality and also give investors confidence to ask for fewer overlays. In practice, reserves for bank statement loans often fall into tiers. Clean service businesses with strong deposits may clear with moderate reserves. Businesses subject to seasonality or client concentration risk may warrant stronger reserves. A preparer letter that documents lean overhead can support a better expense factor but does not replace reserves. Teach your intake teams to ask for brokerage and retirement statements on day one so the reserve conversation starts early.

When a borrower maintains both business and personal accounts, label transfers clearly and remove owner draws from the deposit analysis. For reserves, treat the personal accounts as primary. If business funds are needed, follow the checklist later in this guide to demonstrate that using those funds will not impair operations. Close with a simple call to action that points borrowers to the mechanics page for deposit based underwriting at Bank statement mortgage so document expectations are clear.

P and L only programs and reserve fit

A preparer signed P and L can tell a clean story for service firms with credible books. Even when P and L only produces an excellent income figure, investors still value reserves because they provide runway if margins compress or a client churns. Pair the P and L with a reserve map that shows months of PITIA and which accounts will remain after closing. The combination of accurate books and liquid buffers reads as low risk. It often improves pricing enough to offset slightly conservative income assumptions. Remind borrowers that reserves are not a tax penalty. They are simply a liquidity buffer that gives the credit team confidence to lock better terms.

Asset utilization and asset depletion

Some clients qualify using asset utilization rather than deposits or tax returns. In this method, eligible liquid balances are converted into qualifying income using a program factor or draw rate. It is critical to separate the assets used to compute income from the assets counted as reserves. Do not double count. Build two columns in your memo. The first column is qualifying base. The second is post close reserves. If the borrower plans to move funds between accounts to close, update the reserve column to show the remainder after the transfer. This clarity avoids conditions and helps pricing teams accept a leaner leverage request with confidence.

DSCR for investment properties

For non owner occupied properties, DSCR underwriting focuses on property cash flow. Even when personal income is not central, reserves remain an important lever. Investors look for months of PITIA that match coverage tiers and property risk. A property with strong rent coverage and newer systems may pass with moderate reserves. A property with thinner coverage or older systems may earn approval with thicker reserves and a conservative leverage request. Portfolio investors often receive add on reserve expectations for additional rental properties. Present a clean rent roll, a trailing twelve, and a reserve map that is labeled by property. Educate sponsors with the Investor DSCR loan page so they understand how reserves interact with coverage and experience.

Foreign national reserve realities

International buyers face extra identity and funds verification steps. Thicker reserves can offset documentation complexity because they reduce perceived repayment risk. Provide passport and visa documents, acceptable international statements, and a clear path for funds to close. If currency conversion is needed, present the plan and timing. When assets are held abroad, show that the borrower can move funds to a U.S. account quickly and legitimately. A transparent reserve story speeds underwriting and often improves price. Point prospects to Foreign National mortgage options so they know exactly what will be requested.

Risk layering and how it changes reserves

Reserves rise and fall with overall file risk. Risk increases with higher LTV, lower credit scores, thin or declining income trends, and complex property types. If a file presents several of these at once, invest upfront in reserve strength. You will often recover the cost through better pricing and faster clear to close. When a file has offsetting strengths such as low leverage, long time in business, and a newer property with predictable expenses, reserve expectations may be lighter. Your cover memo should name the primary risks in simple language and show how reserves address them. This turns a subjective conversation into an objective trade that credit can accept.

Primary, second home, and investment differences

Occupancy changes reserve math. Primary residences usually carry the lightest reserve expectations because the home and the payment are central to the borrower’s life. Second homes often step up requirements because payment is additive to the household budget. Investment properties sit at the conservative end of the spectrum because repayment comes from a mix of rent and ownership strength. Use this spectrum to set expectations on your first call. Explain that stronger reserves will buy flexibility elsewhere. For example, a borrower who wants an interest only period on a second home can often earn it with a thicker reserve line.

Business funds and when they can count

Business accounts can count as reserves when two facts are clear. First, the borrower has control and access. Provide operating agreements, ownership certificates, and a simple org chart. Second, the business will not be harmed by moving funds if needed. Provide a CPA letter or cash flow statement that shows the reserve withdrawal would not impair payroll or operations. Label the portion that the borrower would use as personal reserves and show that the business retains its own liquidity after that transfer. If you cannot prove both control and non reliance, do not plan on business funds as a core reserve pillar.

Retirement and brokerage accounts

Retirement accounts count with access based adjustments. If the borrower is of age to access funds without penalty, use current market value and include a confirmation of availability. If the borrower is not yet of age, show plan rules for loans or hardship withdrawals and apply a haircut in your memo. Brokerage accounts are straightforward when positions are diversified. If the account is concentrated in a single stock, consider a voluntary haircut in your reserve math to make the story conservative and credible. Margin accounts require special care. Do not count the portion that is borrowed. Provide a simple calculation that shows net equity after any loans.

Cash out refinance and reserves

Cash out proceeds can satisfy reserve lines when the investor permits it and when documentation ties the use of funds to the post close balance. The sequence matters. Show the expected payoff and the net proceeds on the settlement statement. Then present a simple plan to move those proceeds to an eligible account that will hold reserves after closing. After disbursement, provide an updated statement that shows the deposit and the new balance. This approach is both practical and efficient. Many borrowers prefer to meet the reserve requirement without liquidating long term holdings earlier than needed.

Multiple properties and portfolio reserves

Investors with several rentals often face add on reserve rules. A typical framework asks for a base reserve line for the subject property plus a smaller amount for each additional rental. The logic is that vacancies and repairs rarely happen all at once, but some buffer is prudent. Present a one page portfolio list with addresses, unit counts, current occupancy, and the reserve account earmarked for each property. A portfolio snapshot reads as organized and reduces the need for credit teams to ask for extra detail. It also puts you in position to negotiate lighter add on amounts when coverage and property condition are strong.

ARM or interest only and reserve planning

Non amortizing periods increase the importance of reserves because the payment will eventually rise when amortization begins or when the rate adjusts. When you request an interest only period or a hybrid ARM, pair it with a reserve plan that explains how many months are on hand and how the borrower will prepare for the transition. Some clients plan a partial principal curtailment before amortization begins. Others expect income to rise due to signed contract wins or a business expansion. Document whichever path is realistic and show how reserves bridge the period between today’s cash flow and tomorrow’s payment.

Insurance, taxes, and HOA impact on reserve math

Payment math depends on more than principal and interest. Insurance premiums, especially in coastal or high risk geographies, can move PITIA more than a small rate change. Taxes and special assessments also play a role. Always quote insurance early and verify property taxes before finalizing your reserve count. For condos, obtain the master policy and the condo questionnaire so association dues and coverage are correct. For townhome style properties, confirm whether the HOA covers any portion of the exterior and show that in the narrative. These steps align your opening math with underwriting reality and prevent reserve shortfalls later.

Location aware reserve planning

Reserves should be scaled to local realities because expenses and vacancy patterns vary across the country. In coastal markets exposed to wind and flood, premiums and deductibles can be high. Elevation certificates may influence pricing. Set reserve expectations accordingly and document risk mitigation like roof age and secondary water protection. In university towns, semester breaks create predictable soft quarters. A borrower with healthy reserves can comfortably navigate those cycles. In resort regions, shoulder seasons reduce revenue. Pair an interest only period with a strong reserve line to protect the payment during off peak months. In commission heavy metros, quarter to quarter income swings are common. A thicker reserve buffer buys time between large commission checks. By acknowledging these patterns in your memo, you telegraph realism and earn investor confidence.

Packaging checklist for fast clears

Use a repeatable packet that makes reserve math easy to follow. Include native PDF statements and CSV exports for bank and brokerage accounts. Provide retirement plan summaries that show access rules. Add the operating agreement and EIN letter for any entity accounts. Include a preparer letter when business funds or custom expense factors are involved. Create a one page reserve map that lists each account, the current balance, the deduction for funds to close, and the remaining post close amount. Add the PITIA figure and show the months of coverage in a single line at the bottom. Place this map near the front of your file so credit teams understand the story before they sift through statements.

FAQ to preempt conditions

Can reserves be counted in the same accounts used to calculate income? Not if doing so would double count. Keep those columns separate and show the remainder after funds are applied.

Do gifts count as reserves? Some investors allow gift funds to close but require reserves to be the borrower’s own. When gifts are permitted as reserves, show the donor’s ability and the transfer trail.

How should I treat RSUs? Count vested shares that are saleable. Exclude unvested tranches or show them as a footnote only.

What about joint accounts? Provide statements that show the relationship and write a note allocating the percentage that belongs to the borrower when needed.

How much seasoning is required. Policies vary. Plan for at least two months and be prepared to show sourcing for any large, recent deposits.

Broker talk track for reserve conversations

Frame reserves as a price protection tool. Explain that thicker reserves help earn better pricing because investors see real staying power. Position reserves as a way to choose a more flexible structure like interest only without sacrificing lock integrity. Use simple language. You are pre buying time so that the business can focus on clients rather than scrambling if a check comes in late. Clients respond well when they see reserves as control rather than constraint.

Calls to action and internal links

Open the file with Get a Non-QM quick quote so intake captures statements and plan summaries on day one. Share the mechanics for deposit based underwriting at Bank statement mortgage when the income story relies on deposits. For investment properties, align expectations with Investor DSCR loan and present reserves as the lever that improves terms when coverage is thin. When international clients are involved, point them to Foreign National mortgage options so identity and asset documentation are complete from the start. Reinforce NQM Funding as a trusted Non QM Lender that packages liquidity clearly, prices conservatively, and delivers approvals that last.