Liquidity and Net Worth
How Will Liquidity and Net Worth Affect Your Loan Application?
As a borrower, there are various loan aspects you need to understand. Here, we clarify two of the most important factors: liquidity and net worth.
This is the ability to convert available assets into cash. Here, the lender looks at how fast you can raise cash in case of an emergency. Underwriters regard anything you can convert into cash within 3 days as liquid including cash at hand, stocks and marketable securities. Cash tied up in automobiles, properties, and jewellery is not considered liquid.
Underwriting guidelines vary from lender to lender. However, most lenders require that you have a liquidity of 10 percent of the loan value. For instance if you need a $200,000 loan, your liquidity should be at least $20,000.
Liquidity comes in two forms:
- Pre-fund liquidity: your liquid assets before making the down payment.
- Post-fund liquidity: the liquid assets after paying loan expenses.
Lenders focus more on post-fund liquidity because it shows the available liquid assets in case your business performs poorly.
This refers to everything you owe that has value minus everything you own. Some assets, such as properties might need appraisals by an expert contracted by the lender. If you own more than you owe, your net worth will be positive. If it’s the other way round, you have a negative net worth.
Lenders need you to have a net worth equal to the loan amount for you to qualify for a loan.
How Can We Help?
At Mixed Use Mortgage, we understand the language used by lenders. We have some tips that you can use to increase your liquidity. We also assess your financial situation to decide whether you have the proper net worth to qualify for the loan you need or not, and advice you accordingly.
Don’t hesitate to give us a call and discuss your options, consultation is free and never a fee.