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A borrower filling out a loan application must include any reserves or built-up savings---listed as bank account balances---available to cover future loan payments.
Significance
According to the Federal Reserve Board's website, a few months of reserves, or loan payments, need to be in place to ensure the borrower has a backup in the event of a financial emergency.
Function
The more reserves a borrower has, the less risk the lender has in giving the borrower a refinance, as reserves prove a borrower's liquidity.
Types
The reserves are noted in the form of bank accounts, from checking to savings to money market accounts.
Considerations
A borrower may never need the reserves, but has to show them to the lender to qualify for the mortgage refinance.
Misconceptions
While reserves are important, a healthy savings account cannot overbalance the need for good credit, says the Federal Reserve Board---a borrower with bad credit likely won't be approved, even with a large amount of reserves.
Source:
FederalReserve.gov: A Consumer's Guide to Mortgage Refinancing
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