Definition
Reserves refer to funds set aside by a homeowner, lender, or homeowners association (HOA) for future expenses, repairs, or emergencies related to real estate. These funds ensure financial stability and help cover unexpected costs, such as property maintenance, loan payments, or special assessments.
Explanation
In real estate, reserves can have different meanings depending on the context:
- Lender Reserves: When applying for a mortgage, lenders may require buyers to have a certain amount of cash reserves after closing. This is typically measured in months of mortgage payments (including principal, interest, taxes, and insurance). The purpose is to ensure the borrower can continue making payments even if unexpected financial difficulties arise.
- HOA Reserves: Homeowners associations maintain a reserve fund to cover major repairs and improvements, such as roof replacements, pool maintenance, or road repairs. A well-funded HOA reserve prevents the need for special assessments that would require homeowners to pay large, unexpected fees.
- Investor Reserves: Real estate investors set aside reserves to cover vacancies, repairs, and operating costs, ensuring they can continue managing properties even during periods without rental income.
Example
A homebuyer secures a mortgage with a monthly payment of $2,500. The lender requires three months of reserves, meaning they must have an additional $7,500 in savings after paying their down payment and closing costs.
For an HOA, a condominium association collects $250 per month from each homeowner, with a portion going into a reserve fund to cover future roof replacements or building maintenance. When an unexpected repair arises, the HOA can use these funds instead of requiring an immediate special assessment.