Retirement Accounts and Reserves: The 50% "Haircut" Rule

Rule

Vested retirement funds (such as 401k, IRA, or Keogh accounts) can be used to satisfy liquidity and reserve requirements. However, these assets are valued at 50% of their net cash surrender value for the purposes of loan qualification.

Lendency Insight

When we calculate your reserves, we want to ensure that the money is truly "available" if the investment property runs into trouble. Because most retirement accounts carry significant tax penalties and early-withdrawal fees, $100,000 in an IRA isn't actually worth $100,000 in a crisis—it’s closer to $60,000 after Uncle Sam takes his cut. Additionally, market volatility can swing the value of these accounts overnight. By applying a 50% "haircut," we create a safety margin. This allows you to leverage your long-term savings for your "reserve" requirement without putting your entire financial future at risk.

Common Scenarios & FAQs

• What is "Vested"? It means the money belongs to you. If your employer has a "vesting schedule" and you only own 50% of their contributions, we can only count the part you actually own.

• Do I have to liquidate the account? No. You just need to provide a recent statement showing the balance. We perform the 50% calculation on our end.

• What if I have a 401k loan? If you have an outstanding loan against your 401k, that loan balance must be subtracted before we apply the 50% haircut.

Key Definitions

• Haircut: A percentage reduction in the stated value of an asset for the purposes of calculating reserves or collateral.

• Reserves: The amount of liquid cash an investor must have "on hand" after closing to cover future mortgage payments.