Case Study: Loan 1275 – Ziv: Why Lenders Require Reserves Even When You’re Doing a Cash-Out Refinance

When Ziv applied for a cash-out refinance on Loan 1275, he expected the newly released funds to count toward his liquidity requirements. After all, wasn’t that the point getting cash out to use as needed?

But here’s the reality: Lenders view “cash out” and “reserves” as two separate things and understanding that distinction is crucial if you want your DSCR or investment loan to go through smoothly

What Are Liquidity Reserves?

Liquidity reserves are funds you already have on hand usually in checking, savings, or liquid investment accounts that are completely separate from your loan proceeds.

Lenders require these reserves to:

• Ensure you can make mortgage payments if your income drops.
• Provide a financial buffer in case of vacancy or unexpected expenses.
• Reduce their overall lending risk in the event of loan default.

For DSCR loans, these reserves are especially important, since qualification is based primarily on rental income not personal income.

Why Cash-Out Funds Don’t Count as Reserves

▶️ Cash-Out = Debt

When you do a cash-out refinance, you are borrowing that money it’s not earned, it’s not saved, and it didn’t exist until the lender handed it to you.

From the lender’s perspective:

• Cash-out funds are part of your mortgage.
• They’re tied to the loan, increasing your liability.
• Once disbursed, they’re often earmarked for specific use (property upgrades, other investments, etc.).

This means that you can’t use the borrowed funds to prove you’re financially secure. It would be like using a new credit card limit to prove you have savings.

▶️ Reserves = True Safety Net

Reserves are your own money, already held in liquid form, and available before the loan closes.

Lenders want to see this because it reassures them that:

• You’re not dependent on the loan itself to stay afloat.
• You can manage the new mortgage payment if things don’t go as planned.
• You’re financially stable enough to weather downturns or vacancies.

Real-World Example – Loan 1275 (Ziv)

Ziv applied for a cash-out refinance on an investment property, expecting to receive funds that would improve his liquidity. However, the lender required 3–6 months of reserves based on the new monthly mortgage payment.

Ziv asked:
“Why do I need reserves if I’m getting cash out?”

The answer:
Because that cash out is not available until after closing, and even then, it’s considered borrowed money.

The lender needs to confirm that before giving out the loan, Ziv has enough independent liquidity to:

• Cover several months of mortgage payments.
• Handle surprise repairs or expenses.
• Maintain investment property operations during market fluctuations.

Additional Reasons Reserves Matter in DSCR Loans

1. DSCR Loans Don’t Verify Personal Income
   Instead of W-2s or tax returns, the lender looks at property income vs. mortgage payments. Since they don’t review your salary or job security, they use reserves as a way to offset the unknown.
2. Investment Properties = Higher Risk
   Rental income isn’t guaranteed. A few months of vacancy or a major repair can derail your payment schedule. Reserves offer peace of mind to both lender and borrower.
3. Stronger Files Get Better Terms
   Higher reserves may improve your rate or loan approval odds especially if your DSCR is close to the minimum threshold (e.g., 1.00–1.10).

Final Thought: Reserves Are Not an Obstacle They’re a Safety Net

If you’re pursuing a cash-out refinance like Ziv on Loan 1275, don’t assume the cash you’re about to receive will count as your reserves. Lenders need to know you already have liquidity before they release the funds.

In Summary:

• Cash-out = borrowed money
• Reserves = your own money
• You need both to qualify and protect yourself in the long run

If you’re short on reserves, consider:

• Pulling from a personal savings or brokerage account
• Using funds in a U.S.-based LLC account (if you own 100%)
• Delaying closing to build up liquidity

For direct financing consultations or mortgage options for you visit 👉 Nadlan Capital Group.