Self Employed Trying To Get a Mortgage? Use an Asset Depletion Loan

 

How an Asset Depletion Mortgage Works

To understand an Asset Depletion Loan Program, you must first understand what Asset Depletion is in general. Asset Depletion, which is also known as Asset Dissipation, is what you get when your liquid assets are calculated using a specific formula to provide you with monthly income for qualifying for a mortgage. The income may also be added to any additional monthly income currently being received. This method of qualifying helps you obtain a mortgage loan when you have limited sources of employment income, but substantial assets.

Asset depletion mortgages are good for borrowers with relatively minimal income or no verifiable employment but significant assets such as funds in a bank, investment or retirement account. Examples of potentially applicable borrowers include the self-employed, retired (or almost retired) and wealthy.

The specific mechanics of an asset depletion mortgage vary by lender and program but they generally work the same way. Lenders use a formula to calculate the income that could be generated by depleting a borrower’s liquid assets over a fixed period of time and use that income to determine a borrower’s ability to qualify for a mortgage. The term “asset depletion” is used because the lender assumes that the borrower could sell, or liquidate, his or her assets over time to pay for the mortgage.

The income derived from the asset depletion formula is added to other income the borrower may earn such as employment wages or social security to calculate the debt-to-income ratio the lender applies to determine what size mortgage the borrower can afford. A borrower may have significant assets but if the lender’s asset depletion formula does not yield sufficient income the borrower may not qualify for the desired loan amount. Borrower debt-to-income ratios for asset depletion mortgage vary but generally range between 40% and 45%. Please note that if a borrower generates significant income from his or her assets, such as from dividends, then that income may be subtracted from the asset depletion income so there is no double-counting. In this scenario, the dividend income is still used to help the borrower qualify but it is not considered part of the asset depletion equation.

It is important to highlight that with an asset depletion mortgage the borrower is not actually required to sell any assets over the course of the loan. Additionally, the borrower is not actually pledging any assets as collateral for the mortgage so they are not tied up or restricted after the mortgage closes.

Loan guidelines and pricing vary by lender so it is important to check if this program is offered by your lender and compare multiple proposals to find the best asset depletion mortgage that best meets your goals and needs.

Asset eligibility varies by lender but in general most liquid assets are eligible. Examples include:

• Checking / savings accounts
• Investment account with stocks, bonds, mutual funds, ETFs
• Money market account
• Certificate of deposit (CD)
• Retirement accounts such as 401(k), IRA, SEP, KEOGH may be considered depending on the borrower’s age and any penalty applied for accessing funds in the account. Some lenders may give a borrower partial or no credit for assets in retirement accounts if the borrower is not of, or near, retirement age

There are two basic approaches to determine asset depletion income as outlined below. Review the examples below and be sure to confirm the approach a lender uses to calculate asset depletion income before moving forward with your application.

Approach 1: 

Borrower eligible net assets divided by 360

• Approach 1 Example
• Borrower eligible net assets after down payment and closing costs: $1,000,000
• Monthly income from asset depletion: $1,000,000 (eligible net assets) / 360 months = $2,778 in monthly income
• Some lenders may use a variation of this formula and apply a 20% - 30% discount to eligible net assets

Approach 2:

Eligible net assets plus an investment return divided by 85 minus the borrower’s age

• Approach 2 Example:
• Borrower eligible net assets after down payment and closing costs: $1,000,000
• Return on investment applied to assets: 5.0%
• Borrower age: 65
• Monthly income from asset depletion: $1,000,000 (eligible net assets) @ 5.0% (rate of return) / 240 (85 - 65 (borrower's age) = 20 years * 12 months per year) = $6,600 in monthly income
• Please note that calculating the additional monthly income from the assets is similar to calculating the monthly payment for a mortgage.  For example, for $1,000,000 million in assets at a 5% rate of return over twenty years, the monthly income is $6,600.  $6,600 is also the monthly mortgage payment on a $1,000,000 mortgage with a 5% interest rate and 20 year term
• This approach is beneficial to the borrower because it applies an investment return to the borrower's assets
• Lenders, however, may use different rates for return on investment which can significantly impact a borrower's asset depletion income
• This approach is also favorable to older borrowers while being disadvantageous to younger borrowers because it divides the income by a greater number of months

Typically primary or secondary / vacation residences are eligible for the Asset Depletion program and some lenders may also require more than the typical 20% down payment depending upon the property and occupancy. Borrowers must typically have a minimum credit score of 700 or higher to qualify for an asset depletion mortgage. To demonstrate proof of assets, borrowers are required to provide current and historical monthly account statements in addition to standard personal financial documents such as tax returns and pay stubs, if applicable. Most lenders do not require borrowers to move their assets to the lender in order to qualify for an asset depletion mortgage.

As you can see, assets can in fact assist you in getting a mortgage when proof of income is low. Asset Depletion loans vary in many forms an depending on your situation. For this reason, your interest rate, loan type, and fees will all be determined after all the calculations of your assets.

Give us a call today to discuss all of your mortgage loan options.

Aundrea Beach-Greco

Mortgage Lender, CMPS

NMLS 333739

📱 +1 702-326-7866

📧 info@aundreabeach.com

🌐 www.AundreaBeach.com

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Aundrea Beach-Greco, CMPS. Licensed Mortgage Loan Officer. NMLS 333739

702-326-7866 info@AundreaBeach.com

Find me online www. AundreaBeach.com

Apply online at www.iLendLasVegas.com