When you’re self-employed, securing a mortgage can come with its own set of unique challenges. One of the critical aspects that MortgageDepot emphasizes is the proper handling and calculation of business funds when they are used for down payments, closing costs, reserves, and other related expenses. Ensuring that your business can sustain the withdrawal of these funds is crucial for a smooth mortgage approval process.
Understanding Business Liquidity
Liquidity refers to the ability of your business to meet its short-term obligations without compromising its financial stability. When you plan to use business funds for personal mortgage-related expenses, it’s essential to demonstrate that your business remains solvent after the withdrawal. This is where liquidity ratios come into play.
The Importance of Liquidity Ratios
MortgageDepot highlights two key liquidity ratios that underwriters are required to use when evaluating the financial health of your business:
1. Quick Ratio: This ratio measures the ability of your business to meet its short-term liabilities with its most liquid assets. The formula is:
A quick ratio of 1 or higher indicates that your business has enough liquid assets to cover its short-term liabilities without relying on the sale of inventory.
2. Current Ratio: This ratio provides a broader view of your business’s ability to pay off its short-term obligations. The formula is:
Similar to the quick ratio, a current ratio of 1 or higher signifies that your business can meet its short-term liabilities with its current assets.
Why These Ratios Matter
For a self-employed borrower, these ratios are not just numbers; they are a testament to the financial health of your business. A ratio below 1 indicates that your business may struggle to meet its short-term obligations, which can be a red flag for underwriters. In such cases, the use of business funds for personal mortgage-related expenses will not be allowed, as it could jeopardize the solvency of your business.
Steps to Ensure Compliance
1. Pre-Assessment: Before you even apply for a mortgage, calculate these ratios to ensure your business meets the required thresholds.
2. Documentation: Keep detailed financial records that clearly outline your current assets, inventory, and liabilities. This will make it easier for underwriters to verify your calculations.
3. Consultation: Work with a financial advisor or mortgage consultant to review your business’s financial health and ensure that you are in compliance with the required ratios.
For more personalized advice and assistance, feel free to reach out to our team at MortgageDepot. We’re here to help self-employed borrowers navigate the mortgage landscape with confidence and ease.