Which type of loan is most likely to have a requirement for reserves after closing?

The most likely type of loan to have a requirement for reserves after closing is a conventional loan. Reserves refer to the amount of liquid assets that a borrower has available after the down payment and closing costs have been paid. Conventional loans, often conforming to guidelines set by Fannie Mae and Freddie Mac, typically require borrowers to demonstrate financial stability and preparedness for future mortgage payments, which is assessed through reserve requirements.

Having reserves serves as a buffer for lenders, ensuring that borrowers have additional funds to cover mortgage payments in case of unexpected financial challenges. In contrast, loans backed by FHA or VA might prioritize different criteria, focusing more on the borrower’s creditworthiness and history rather than strict reserve requirements. Subprime loans also cater to borrowers with lower credit scores and may not have the same emphasis on reserves due to their risk profile and differing lending standards. Thus, the expectation for reserves is more pronounced within the framework of conventional financing.