Can I qualify for a mortgage based on my assets?
Not all mortgage borrowers have traditional means of employment or income.
In fact, there are a lot of people who fall into non-traditional income categories, such as:
- You are self-employed but have a minimal income
- You are retired (or almost retired)
- You earn relatively little income, if any
- You don’t have a verifiable job
If any of these apply to you, but you have significant assets, such as savings, investment, or retirement accounts, you may be eligible for an asset depletion mortgage program.
Check your mortgage eligibility (June 16, 2021)
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What is an asset depletion loan?
Also known as “asset dissipation,” asset depletion is a way to qualify for a loan using substantial assets rather than employment income.
With an asset depletion mortgage, your monthly “income” is calculated by dividing your total cash flow by 360 months (the length of most mortgages).
This way you can prove that you have enough money to cover the loan even without regular employment income.
The use of funds from depletion of assets shall not do not means you need to qualify based on your assets only. You can use it as an additional source of “income” on top of any regular income you are currently receiving.
That said, borrowers who use an asset depletion program to qualify do not need to show any other source of income or employment. If their assets are sufficient to pay off the loan – along with regular living expenses – they may be eligible based on this calculation alone.
Plus, mortgage borrowers are not required to cash out their assets right away. Assets are only used to demonstrate the ability to make mortgage and housing payments.
Check your new rate (June 16, 2021)
How Depletion Mortgages Work
Depletion loans use your assets as collateral instead of your income.
This program allows you to deplete your assets in order to record that money as income for the life of the loan.
There are a few facts and figures borrowers should understand before embarking on an asset depletion program.
Assets eligible for mortgage qualification
First of all, understand that only certain types of assets can be used for mortgage qualification. These typically include:
- Chequing or savings accounts
- Money market accounts
- Certificates of deposit (CD)
- Investment accounts such as stocks, bonds, and mutual funds
- Retirement accounts such as 401k or IRA
Not all retirement accounts will be eligible, depending on the age of the mortgage borrower and the potential penalties applied to access funds in the account.
Lenders can only give partial credit, or no credit at all, for retirement account assets if the mortgage borrower has not yet reached or is approaching retirement age.
How many of your assets are counted?
Even for qualifying assets, lenders will not necessarily count the full amount as “income” on your mortgage.
- For liquid assets – like a savings account – lenders typically count 100 percent of funds
- Investment assets can be calculated at around 70 percent of your total holdings
- For retirement accounts, only 50 to 70 percent of funds can be counted, depending on the age of the borrower
The exact calculations vary by lender, which means it is very important to compare different mortgage lenders and find an asset depletion program that matches your needs.
The asset balance is divided by 360. This amount is used as monthly income when you qualify.
Once your total assets are calculated, the balance is divided by 360 (regardless of the loan terms) to be split into monthly payments. These installments are then used to meet the income requirements for the loan.
Mortgage requirements for depletion of assets
Lenders don’t just look at a borrower’s assets when they qualify for a loan for depletion of assets. They must also meet mortgage loan requirements.
Since these loan programs are not regulated by any national or government agency, it is up to the lenders to set their own requirements.
This means that loan guidelines for asset depletion can vary widely from lender to lender.
As a general rule, borrowers should expect to need:
- A deposit of 25 to 30 percent
- A credit score of 680-700 or higher
- A debt-to-income ratio of less than 50%
Example of a mortgage on depletion of assets
Let’s say a 49-year-old mortgage borrower has $ 2,000,000 in liquid assets and $ 500,000 in retirement or investment accounts.
Here is how their monthly income could be calculated.
- Retirement account – 70% of $ 500,000 = $ 350,000
- Total counted assets – $ 2,000,000 + $ 350,000 = $ 2,350,000
- Monthly income – $ 2,350,000 / 360 =$ 6,527
In this case, the lender will calculate the borrower’s maximum mortgage payment based on a monthly “income” of $ 6,527.
Remember, this is their total income – not their maximum mortgage payment.
The amount they can spend on a mortgage depends on their existing debts and the maximum amount of the lender debt to income ratio.
If the lender applies a maximum debt-to-income ratio of 36%, the maximum possible mortgage payment in this scenario is $ 2,350.
But, let’s say the borrower has existing debts. This reduces the amount they can spend on their mortgage each month.
If the borrower in this scenario has existing debt payments of $ 350 per month, their maximum mortgage payment is reduced to $ 2,000 per month.
Combined with the borrower’s interest rate, this number will help determine how much loan they qualify for and how much a home they can afford.
Should you use an asset depletion mortgage?
Wondering whether or not you are a good candidate for an asset depletion program?
Start by answering these questions.
- Are you retired with very little fixed income (or no income)?
- Are you self-employed but have little or no income?
- Are your assets held in the United States?
- Do you have Trust assets that are completely unlimited in use?
- Do you have 25 to 30 percent for the down payment?
If you answered yes to any of these questions but are rich in assets, an asset depletion loan might be an ideal solution.
However, this is not the only option.
Independent homebuyers, for example, may not have the W2 or work history required to qualify for traditional mortgages. But they can often get a bank statement loan who reviews regular monthly cash deposits instead of their tax returns.
Find lenders for depletion of assets
Not all lenders offer depletion mortgages. In addition, not all loan programs allow depletion of assets as an acceptable source of income.
Most major banks offer depletion mortgages. You can also find “portfolio lenders” who offer asset depletion programs.
But keep in mind that loan guidelines vary by lender. You’ll want to shop around and compare rates, closing costs, and closing times before you make your decision.
As with all mortgages, it’s important to find an asset depletion loan that offers rates and terms that are favorable to your situation. Your rate will always affect your monthly payment and will have a big impact on your loan costs in the long term.
Check your new rate (June 16, 2021)