Income
Liquid Assets: Definition & Example
What Is Liquid Assets?
Liquid assets are cash and other holdings that can be quickly converted to cash without significant loss of value, such as checking, savings, money market accounts, and publicly traded securities.
What does liquid assets mean?
Cash in bank accounts is the most liquid asset. Money market funds, Treasury bills, and publicly traded stocks and bonds are also generally considered liquid, though their value can change. Real estate, cars, private business interests, and most retirement accounts (because of penalties and taxes) are less liquid.
Lenders and landlords look at liquid assets as a cushion. Enough liquid assets can offset thinner income, cover a down payment and reserves, or support an application from someone who is retired or between jobs.
Some programs count only a percentage of retirement or investment balances, such as 60% to 70%, to account for taxes, penalties, and market swings.
Liquid assets example
A retiree applying for an apartment has modest monthly income but holds $28,000 in savings and $95,000 in a brokerage account. The landlord’s criteria allow applicants with liquid assets of at least 24 times the monthly rent to qualify without meeting the income multiple, and she clears it easily.
Related terms
- Cash ReservesCash reserves are liquid funds a borrower or business still has available after a transaction closes, often measured in months of housing payments or operating expenses.
- Proof of FundsProof of funds is documentation showing that a person or business has enough money available for a purchase or investment, usually a recent bank or brokerage statement or a bank letter.
- Average Daily BalanceAverage daily balance is the average amount of money in an account across every day of a period, calculated by adding each day’s ending balance and dividing by the number of days.
- Verification of DepositVerification of deposit (VOD) is a form, commonly used in mortgage lending, in which a bank confirms an applicant’s account details, current balance, and average balance.
- Compensating FactorsCompensating factors are strengths in an application, such as large savings, long job history, or low payment shock, that can offset a weakness like a high debt-to-income ratio or thin credit.
