Liquidity matters to the lender particularly in bumpy times like these because it’s an indication of financial responsibility. Extra cash reserves are an indication—to borrow a phrase from popular culture—that the borrower understands inevitably “winter is coming,” and has planned for it. “Winter” could be job loss, loss of an aircraft partner, or a pandemic.
Liquidity is pretty straightforward to a lender: readily available cash and marketable assets. Marketable assets include equities, bonds, mutual funds. What does not count as liquidity? Collections—cars, art, comic books and other items with specific, volatile-valued, niche markets. One more thing not considered a liquid asset in the eyes of a lender? Retirement assets, unless you are at least 59½ years old.
You cannot count retirement assets as liquidity because you cannot convert them to cash if you are under retirement age without significant penalties and tax consequences. That in itself would significantly reduce the actual assets. More importantly, legally, a lender cannot force a person who has yet to reach retirement age who defaults on their loan to liquidate retirement accounts. In fact, in most cases, unless the creditor is the federal government, retirement assets are protected from seizure in bankruptcy proceedings. A possible exception to that are traditional ROTH IRAs, which are protected from bankruptcy up to a certain dollar amount.
For individuals over 59½, the general rule of thumb lenders use to value retirement assets is to apply 5% of the principal value as the annual income stream one derives from the portfolio.
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