For self-employed borrowers, access to business funds can be a valuable resource when purchasing or refinancing a home. These funds are often used for down payments, closing costs, or reserve requirements. However, conventional mortgage guidelines require lenders to carefully evaluate whether withdrawing funds from a business could negatively impact its financial stability.
We work closely with self-employed borrowers to ensure that business funds are used properly and in compliance with underwriting standards. One of the most important steps in this process is confirming that the business remains financially solvent after the withdrawal.
Using Business Funds
When a borrower uses business funds for a mortgage transaction, the lender must verify that the withdrawal will not harm the business’s ongoing operations. The business must demonstrate sufficient liquidity to continue meeting its obligations after the funds are removed.
Under conventional loan guidelines, underwriters are required to analyze the business’s financial strength using specific liquidity ratio tests. These tests help determine whether the business can safely absorb the withdrawal without creating financial risk.
If the business cannot demonstrate adequate liquidity, the funds cannot be used for the mortgage transaction, even if they are available in the account.
The Two Required Liquidity Tests
Conventional underwriting guidelines require the use of two key financial ratios:
1. Quick Ratio
Formula:
(Current Assets – Inventory) ÷ Current Liabilities
The Quick Ratio measures the business’s ability to cover its short-term liabilities using its most liquid assets, excluding inventory. Inventory is excluded because it cannot always be quickly converted into cash.
This ratio provides a conservative and realistic view of the company’s immediate financial strength.
2. Current Ratio
Formula:
Current Assets ÷ Current Liabilities
The Current Ratio evaluates the business’s overall ability to meet its short-term obligations using all available current assets, including inventory.
This ratio gives a broader picture of the company’s short-term financial health.
Minimum Required Ratio: 1.0 or Higher
Both ratios must return a result of 1.0 or greater for the business to be considered solvent.
A ratio of 1.0 means the business has enough current assets to cover all its current liabilities. Ratios above 1.0 indicate stronger financial stability.
If either ratio falls below 1.0, the business is considered to have insufficient liquidity, and the borrower will not be permitted to use business funds for:
Using business funds for a mortgage can be an excellent strategy when done correctly. The key is proper analysis, documentation, and planning.
