DSCR Reserves: How Many Months You Actually Need
Reserves are the quiet reason investor files stall. Two months of PITIA is the standard, and it steps up with loan size. Here is what counts toward it.
Quick answer: the standard DSCR reserve requirement is two months of PITIA. Above a $1.5M loan amount it becomes six months, and above $2.5M it becomes twelve. Cash-out refinance proceeds may be used to satisfy the requirement.
Reserves are the least discussed number on an investor file and one of the most common reasons a file that looked fine goes quiet. The property qualifies, the credit is there, and then the file needs assets nobody planned for.
What a reserve requirement actually is
Reserves are liquid assets you hold after closing, measured in months of the property’s full housing payment. PITIA means principal, interest, taxes, insurance and any association dues. Two months of reserves on a $2,400 PITIA means $4,800 left after the deal funds, not $4,800 used at closing.
The requirement scales with loan size, because a larger loan carries a larger consequence if something goes wrong.
Standard: two months of PITIA.
Loan amount above $1.5M: six months of PITIA.
Loan amount above $2.5M: twelve months of PITIA.
Cash-out proceeds can satisfy it
This is the part worth knowing before you assume you are short. On a cash-out refinance, the proceeds may be used to meet the reserve requirement. The money coming out of the property can be the money that satisfies the file.
There is a related limit on how much cash you can take in hand. Above 65% LTV the cash-in-hand maximum is $500,000. At or below 65% LTV it is $1,000,000. Neither applies to delayed financing transactions.
What else underwriting is checking alongside reserves
Reserves rarely arrive as the only question. A few requirements travel with them.
Assets need a minimum of 30 days of verification. A balance that appeared last week invites a question about where it came from.
Gift funds are allowed, but only after a minimum 10% borrower contribution.
All credit, income and asset documentation carries a 120-day maximum age. Paperwork gathered early in a slow search can go stale before closing.
How to plan for it
Work backwards from the payment rather than from the purchase price. Estimate the full PITIA including taxes at the reassessed value and insurance at today’s premium rather than the seller’s, then multiply by the reserve months for your loan size. That figure is what you need left over, on top of down payment and closing costs.
Investors who get surprised here are almost always the ones who budgeted to the down payment and stopped.
Frequently asked questions
Do reserves have to be cash? They must be liquid and verified. Ask about specific account types before assuming one qualifies.
Does the requirement change if I own other properties? The reserve requirement above is set by loan amount. Other holdings can raise other questions.
Can cash-out proceeds cover reserves? Yes, on a cash-out refinance the proceeds may be used to satisfy the requirement.
How long do assets need to be seasoned? A minimum of 30 days of verification.
Not Sure Where Your File Lands?
Send us the property and a rough picture of your assets. We will tell you what the reserve requirement looks like before you are under contract.
Submit a Scenario: https://tqltpo.totalqualitylending.com/submit-scenario
Schedule a Consultation: https://calendly.com/totalquality/investmentconsultation
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The Total Quality Lending Team
Total Quality Financial, Inc. | NMLS #1933377. Seasoning, LTV limits, and documentation requirements vary by program and are subject to change without notice and underwriting approval. Not a commitment to lend. Not all applicants will qualify. Equal Housing Lender. www.nmlsconsumeraccess.org
