In one sentence
A monthly escrow funded by the borrower to pay for capital repairs and replacements, sized from the property condition assessment.
The longer version
The property condition assessment produces an estimate of capital needs over the loan term, and the replacement reserve converts that into a per unit or per square foot monthly deposit. Agency and HUD programs prescribe the method; balance sheet lenders often negotiate it.
Draws require evidence: invoices, proof of completion, and sometimes inspection. Servicing administers this for the life of the loan, so the reserve agreement and the assessment it was sized from both need to travel from closing into the servicing file.
Common questions
- How is a replacement reserve sized?
- From the property condition assessment, which estimates capital needs over the loan term. The estimate is converted into a monthly deposit, commonly expressed per unit or per square foot.
- What is needed to draw on it?
- Typically paid invoices or contractor billing, evidence the work was completed, and in some programs an inspection. The requirements sit in the reserve agreement.
- Is a replacement reserve the same as a repair escrow?
- No. A repair escrow funds specific deferred maintenance identified at closing with a deadline attached. A replacement reserve funds ongoing capital needs across the loan term.
Keep reading