Quick answer
Most DSCR programs require the borrower or guarantor to show reserves after paying down payment and closing costs. Reserves are commonly measured in months of PITIA, and the required number varies by lender, program, leverage, loan size and coverage ratio. Eligible assets usually include bank, brokerage and certain retirement accounts, often with haircuts on non-cash holdings.
Overview
Because a DSCR loan relies on the property income rather than personal income, lenders look for evidence that the borrower can carry the property through vacancy, repairs or a temporary drop in rent. Reserves serve that purpose. They are not escrowed or pledged in most programs; the borrower simply demonstrates that the funds exist and are accessible.
How reserves are measured
Reserves are usually stated as months of PITIA for the subject property. If a program requires a certain number of months and the monthly PITIA is known, the required reserve amount is that number multiplied by the PITIA. Some programs add a requirement for additional months tied to other financed properties the borrower owns, and some express the requirement as a flat dollar figure.
Factors that change the requirement
- Loan-to-value: higher leverage often calls for more months of reserves.
- Loan amount: larger loans frequently carry larger requirements.
- Coverage ratio: files with a DSCR near or below the program minimum may require additional reserves as a compensating factor.
- Transaction type: cash-out refinances sometimes permit loan proceeds to count toward reserves; purchases do not have that option.
- Borrower experience: some programs treat first-time investors differently from experienced landlords.
All of these thresholds vary by lender, program and investor guidelines.
Eligible assets
- Checking and savings accounts, typically counted in full.
- Brokerage accounts holding stocks, bonds or mutual funds, often counted at a reduced value to reflect market risk.
- Retirement accounts, often counted at a reduced value to reflect taxes and early withdrawal costs, and only where withdrawals are permitted.
- Business accounts, when the borrower owns the business and access to the funds is documented.
- Cash-out proceeds from the subject transaction, where the program permits.
Documentation
Lenders usually request recent consecutive statements for each account. Large deposits that are not consistent with the account history may need a written explanation and source documentation. Gift funds, cryptocurrency and borrowed funds are treated very differently across programs and are frequently ineligible for reserves even where they may be used for closing costs.
Reserves versus funds to close
Funds to close cover the down payment, closing costs and prepaid items. Reserves are what remains afterward. A borrower must therefore show enough assets to satisfy both; assets used to close cannot also be counted as reserves.
Common pitfalls
- Moving money between accounts shortly before application, creating deposits that must be sourced.
- Counting retirement funds at full face value.
- Overlooking additional reserve requirements tied to other financed rentals.
- Using reserve funds for renovation between approval and closing.
Related terms
Reserves are measured in months of PITIA and are often weighed alongside the DSCR ratio as a compensating factor.