What is an Asset Depletion Mortgage Loan

Asset Depletion Mortgage Loans: The Definitive Guide for Wealthy Borrowers

Having Deep Knowledge Of Asset Depletion Mortgage

Have you heard of the concept of “asset-rich, income-poor? It involves individuals who seem rich in assets but lack a steady income or salary. This phenomenon causes most mortgage applications to crash, as they rely heavily on a prospective mortgage lender’s income and employment history.” Suppose your financial strength lies in savings and investments rather than having a paycheck. In that case, this is where asset depletion mortgages come in.  John Strange, a senior mortgage loan originator at GCA Forums Mortgage Group says the following about Asset Depletion Loans:

Asset depletion loans provide unconventional income streams for borrowers with substantial wealth. Unlike most mortgage loans, which require monthly payments, these loans base the monthly payment on a monitored account with various assets, calculating hypothetical income based on them depleting slowly over time.

This guide will discuss everything related to asset depletion mortgage loans, including who they are designed for, how the loans operate, the required qualifications, their advantages and disadvantages, and whether this is the right financing option for you. In the following paragraphs, we will cover asset depletion mortgage loans and how they work.

What Is An Asset Depletion Mortgage Loan?

An asset depletion mortgage loan (or asset utilization loan) is a unique type of financing that allows borrowers to qualify based on their wealth instead of traditional income verification methods. Instead of proof of income like W-2s, tax returns, or pay stubs, borrowers can utilize their liquid assets to demonstrate repayment capability.

The underlying principle of these loans is straightforward: your assets can generate income that helps pay off a mortgage over time. Lenders estimate a fictitious monthly income by calculating the total qualifying assets and dividing that by the loan term, usually 360 months (30 years).

How Asset Depletion Income Is Calculated

Calculating asset depletion income is radial as it has a single underlying method of calculation, though particular lenders may have some idiosyncratic practices:

• Identify Qualifying Assets: Determine which assets can be included (usually liquid assets such as cash, investments, and retirement accounts).
• Apply Any Discount Factors: Certain lenders will discount some assets (e.g., use only 70% of retirement account values).
• Calculate Total Qualifying Assets: Add up all applicable assets after any considered discounts.
• Divide by the Loan Term: Divide the total by the loan term, commonly 360 months.
• Result: Monthly income for qualification “purposes”.

Example Calculation of Asset Depletion

Let’s analyze the use case for withdrawal or asset depletion income the borrower might have:

Borrower Assets:

• Investment accounts: $500,000.
• Retirement accounts: $300,000.
• Checking/savings: $200,000.

Calculation:

• Investment accounts: $500,000 x 1 = $500,000.
• Retirement accounts: $300,000 x 70% = $210,000.
• Cash accounts: $200,000 x 1 = $200,000.
• Total qualifying assets: $910,000.
• Asset depletion income: $910,000/360 months = $2,528 monthly.

The given amount can then serve in evaluating the debt-to-equity ratio coupled with determining the threshold for the loan devoid of us disclosing identifying information for the projection.

Who Benefits From Asset Depletion Loans?

As with virtually every type of financing, some kinds of borrowers would benefit more from asset depletion loans than others:

Retired and Elderly

Most retirees have significant wealth but very little income every month. This wealth is usually locked in a retirement plan, various investments, and other assets as a net worth. These borrowers can convert their life savings into sustaining mortgage credit with asset-depleting loans.

Wealthy People

Asset-based lending is most suitable for wealthy people. Such people have a fragmented income stream from diverse businesses, investments, and other owned assets, which, when combined, requires them to redraw ridiculous amounts of resources. As such, the standard verification suffices, which is based on asset depletion loans and not income.

Freelancing Business Owners

Self-employed people like freelancers and business owners tend to have stagnant incomes, making a standard mortgage impossible. If such individuals possess sizeable assets, these assets could qualify them for an asset depletion loan with little to no income verification.

Buyers of Investment Properties

Asset depletion loans can be useful for expanding an investor’s real estate portfolio, particularly when the property under consideration is not income-generating or is encumbered by complex income documentation requirements.

Qualifying Assets for Asset Depletion Mortgages

Not all assets are equal when it comes to asset depletion mortgages.

Here is a summary of what most lenders consider and how they classify such assets.

Most Liquid Assets (Full Value)

• Bank account cash, including checks and savings.
• CDs.
• Money market accounts.
• Investment accounts not associated with retirement (stocks, bonds, mutual funds).
• Life insurance policies with cash value

Retirement Accounts (Partial Value)

• 401(k) and 403(b) plans.
• IRAs.
• SEP IRAs and other retirement accounts.

They are usually marked down by at least 30% to account for taxes and penalties that would occur if these funds were accessed prematurely.

Equity in Real Estate (Accounted for Less)

A few lenders may include equity on properties outside of the primary residence, but this tends to be more restrictive and may be heavily discounted.

Assets Not Generally Considered

• Personal items (cars, paintings, pretty things).
• Business-related assets.
• Anticipated future inheritance.
• Assets that are not easily sold.

Qualification Requirements for Asset Depletion Loans

Many lenders have differing criteria, but for the most part, asset depletion loans are more strict than conventional mortgages:

Minimum Asset Requirements

Most lenders have a set amount of assets for borrowers to be eligible. They will often stipulate at least $500,000 in qualifying liquid assets. Some jumbo loan programs may want $1 million or more.

Credit Score Requirements

These loans require a higher credit score, a minimum FICO score of 700-720, and better conditions for those above 740.

Down Payment Expectations

Unlike traditional mortgages that may accept down payments of 3-5% and 20% or more, these loans generally demand higher down payments.

Debt-to-Income DTI Requirements

Even with asset depletion income calculations, there are usually DTI limits, capping total monthly debt payments, including a new mortgage, at 43-45% of income.

Reserve Requirements

The requirement to maintain a certain amount of paying wealth is usually more than 12-24 months post-closing and reserve PITI payments.

Advantages of Asset Depletion Mortgage Loans

• Alternative Qualification Path: The primary benefit is the ability to qualify based on assets rather than income, which is helpful for those in less-than-ideal financial situations.
• Potential for Larger Loan Amounts:Those with significant assets may benefit from asset depletion calculations, which provide them with a higher “income” than their actual income and qualify them for larger loans.
• Financial Flexibility: These loans let borrowers purchase real estate without selling off their other investments, thus preserving their investment growth and avoiding the tax implications of liquidating assets.
• Retirement Planning Benefits: These loans can form part of a well-thought-out retirement strategy that helps retirees buy or refinance homes without disrupting their retirement income streams.

Disadvantages and Considerations

• Higher Costs: Asset depletion loans generally carry higher interest rates, fees, and closing costs than conventional mortgages.
• Limited Availability: Not all lenders offer asset depletion programs, and lenders that do may have different policies and add additional limitations and restrictions.
• Substantial Assets Required: These loans typically exclude all but the wealthiest borrowers due to the lack of liquid assets required, making them inaccessible to most prospective homebuyers.
• Exhaustive Documentation: Multi-layered oversight in asset management requires the user to go through more complex and thorough documentation, which is not easy.
• Impact on Investment: Assets set aside as guarantees for securing a loan will be frozen if the loan is active, creating inflexible conditions for midterm investments.

Is An Asset Depletion Loan Right for You?

Think of these criteria while determining if an asset depletion mortgage fits your needs:

Good Candidates:

• You possess large liquid assets but have a low-paying job or work part-time.
• Your income is volatile or hard to capture.
• You are retired or close to retirement and have decent savings.
• You wish to maintain your investment portfolio instead of cashing it out.
• You have excellent credit and can afford a large downpayment.

Poor Candidates:

• You possess limited cash assets.
• You have an easily documented income that qualifies you for a standard loan.
• You’re looking for the most competitive rate available.
• A large downpayment would be difficult to make.
• Your credit is average or below average.

How To Apply For An Asset Depletion Mortgage

Step 1: Assess Your Assets

Before contacting lenders, list your qualifying assets and determine an income amount using the asset depletion calculation method mentioned previously.

Step 2: Locate Specialized Lenders

Search for lenders that have asset depletion programs. Some may include:

• More prominent national banks
• Private banks with wealth management.
• Portfolio lenders.
• Mortgage brokers who focus on non-conventional loans.

Step 3: Collect all documentation.

Be ready to provide in-depth documentation such as:

• Most up-to-date statements for all pertinent accounts.
• Proof of ownership for all items.
• Liquidation values and penalties (if applicable).
• Credit reports and history.
• Standard documents for a mortgage application.

Step 4: Compare Offers.

With asset depletion loans differing from lender to lender, keep the following in mind to easily compare offers.

• What interest rates do they charge?
• Fee structuring.
• Calculation of assets.
• How much of a down payment will they require?
• What are the terms given for repayment?

Step 5: Secure the Loan

It’s time to secure the loan with the selected lender. After choosing the lender, go through the application process, submit all documentation required, and go through closing requirements.

Other Options for Consideration Aside from Asset Depletion Loans

In the case that an asset depletion loan isn’t the right fit for you, consider these alternatives:

Securities-Based Lending

Suppose you want to borrow against your investment portfolio with the intention of financing. Doing so can allow you to retain your assets long-term, usually at more favorable rates than asset depletion mortgages.

Cash-Out Refinance

A cash-out refinance may help fund a new purchase if you already have equity in another property.

Gift Funds For A Conventional Loan

If income is the main concern, a loan may be obtained for others using gift funds towards the down payment.

Portfolio Loans

Certain lenders provide portfolio loans that are maintained on the lender’s portfolio for the secondary market in Making Informed Decisions. Unlike others, these types of loans guarantee smoother underwriting processes.

• Asset depletion mortgage loans provide a worthwhile financing option for borrowers with considerable wealth who do not earn or earn irregular income.
• By understanding how these loans work, their requirements, advantages, and limitations, one can wisely determine if such a mortgage product fits one’s financial standing and homeownership aspirations.
• Note that mortgage financing is just one part of your overall financial considerations.
• Decisions made with asset depletion loans require the aid of financial and mortgage advisors to ensure enduring sound choices for financial health and wealth preservation.

Asset depletion loans may provide the solution for your next real estate investment, whether you are a retiree wanting to adjust your living space, a thriving businessperson with complicated earnings, or a financially affluent individual wanting some maneuverability with your finances.