What is meant by liquidity reserves when applying for a loan?

[Kevin Meehan]

When applying for a mortgage loan, it is important to find out the lenders' liquidity requirements before you even complete or submit a formal loan application. Part of the pre-application process at Atlas is to review a borrowers PFS (personal financial statement). That statement should list all the borrower’s current liquid assets including: personal bank accounts, stock accounts, cash value life insurance policies, and of course liquid assets that may be in a business account. Be sure you have statements to back-up what you list as of that date, since an underwriter may ask for them. Why is this so important? While you may have sufficient cash to close on a new property, nearly every lender will look at the liquid assets to determine if the applicant has sufficient fallback cash reserves post-closing. These reserves can vary from lender to lender and also by loan program. Cash liquidity reserves are also applicable for refinancings, even if the new loan is providing substantial cash-out to the borrower. In that case, the underwriter may be looking at pre-close rather than post-close reserves. Basically, the purpose of this review is to see just how long a borrower can weather a downturn or be able to come-up with cash in the event of a major urgent capital need. Any questions, let me know.