What calculation is used to determine cash reserves from liquid assets?

The correct approach to determining cash reserves from liquid assets involves calculating a two-month average balance. This calculation offers a reliable representation of an applicant's financial stability and ability to cover housing costs, including mortgage payments, after the loan is finalized. A two-month average smooths out any fluctuations in liquid asset balances, providing a clearer picture of the individual's financial situation.

The two-month average is particularly important in assessing the ongoing capability to manage home expenses, as it reflects consistent financial behavior over a short period, thereby ensuring that the reserves are not simply inflated by a singular deposit or temporary increase in balance. This calculation is critical in USDA Rural Housing Loan assessments, as it helps lenders evaluate the risk associated with lending to the applicant, ensuring that borrowers are financially equipped to handle the responsibilities of homeownership.