What is an asset depletion mortgage? How asset depletion loans work

Craig Berry
The Mortgage Reports contributor

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 plenty of folks who fit into non-traditional income categories, such as:

  • You are self-employed but show minimal income
  • You are retired (or almost retired)
  • You make relatively minimal income, or none at all
  • You have no verifiable employment

If any of these apply to you, but you have significant assets — such as savings, investments, or retirement accounts — you may qualify for an asset depletion mortgage program.

Verify your mortgage eligibility (Jul 27th, 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 income from employment.

With an asset depletion mortgage, your monthly ‘income’ is calculated by dividing your total liquid assets by 360 months (the duration of most mortgage loans).

In this way, you can prove you have enough money to cover the loan even without regular income from employment.

Using funds from asset depletion does not mean you have to qualify solely based on your assets. You may use it as an additional ‘income’ source on top of any regular income you currently receive.

That said, borrowers who use an asset depletion program to qualify do not need to show any other sources of income or employment. If their assets are sufficient to pay for the loan — as well as regular living expenses — they can qualify based solely on that calculation.

In addition, mortgage borrowers are not required to cash in their assets right away. The assets are only used to demonstrate an ability to make the mortgage and housing payments. 

Verify your new rate (Jul 27th, 2021)

How asset depletion mortgages work

Asset depletion loans use your assets as collateral instead of your income.

This program allows you to deplete your assets as a way to count that money as income for the duration of the loan.

There are a few facts and figures borrowers need to understand before diving into an asset depletion program.

Eligible assets for mortgage qualifying

First, understand that only certain types of assets can be used for mortgage qualifying. These typically include:

  • Checking or savings accounts
  • Money market accounts
  • Certificates of Deposit (CD)
  • Investment accounts such as stocks, bonds, and mutual funds
  • Retirement accounts such as a 401k or IRA

Not all retirement accounts will qualify, depending on the mortgage borrower’s age and potential penalties applied for accessing funds in the account.

Lenders may only allow a partial credit, or no credit at all, for assets in retirement accounts if the mortgage borrower isn’t yet at or near retirement age.

How much of your assets are counted?

Even for allowable assets, lenders won’t necessarily count the whole amount toward your mortgage ‘income.’

  • For liquid assets — like a savings account — lenders typically count 100 percent of the funds
  • Investment assets may be calculated at around 70 percent of your total holdings
  • For retirement accounts, only 50 to 70 percent of funds may be counted, depending on the borrower’s age

The exact calculations vary by lender — which means it’s extra important to compare different mortgage lenders and find an asset depletion program that fits your needs.

The asset balance is divided by 360. That amount is used as your monthly income when qualifying.

Once your total assets have been calculated, the balance is divided by 360 (regardless of loan terms) to be split into monthly installments. These installments are then used to meet income requirements for the loan.

Asset depletion mortgage requirements

Lenders don’t just look at a borrower’s assets when qualifying them for an asset depletion loan. They also need to meet mortgage lending requirements.

Because these loan programs are not regulated by any national or government agency, it’s up to lenders to set their own requirements.

That means asset depletion loan guidelines can vary a lot from one lender to the next.

Typically, borrowers should expect to need:

  • A down payment of 25 to 30 percent
  • A credit score of 680-700 or higher
  • A debt-to-income ratio below 50 percent

Asset depletion mortgage example

Let’s say a 49-year-old mortgage borrower has $2,000,000 in liquid assets, and another $500,000 in retirement or investment accounts.

Here’s how their monthly income might be calculated.

  • Retirement account — 70% of $500,000=$350,000
  • Total assets counted — $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 lender’s maximum debt-to-income ratio.

If the lender enforces a maximum debt-to-income ratio of 36 percent, the maximum possible mortgage payment in this scenario is $2,350.

But, 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 what loan amount they qualify for and how high of a home price 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 show little to no income?
  • Are your assets held in the U.S.?
  • Do you have Trust assets with totally unrestricted use?
  • Do you have 25 to 30 percent for the down payment?

If you answered yes to any of these questions, but you’re asset-rich, an asset depletion loan could be an ideal solution.

However, it’s not the only option.

Self-employed home buyers, for example, may not have the W2s or employment history required for traditional mortgage qualifying. But they can often get a bank statement loan that looks at regular monthly cash deposits instead of their tax returns.

Finding asset depletion lenders

Not all lenders offer asset depletion mortgages. Further, not all loan programs allow for asset depletion as an acceptable income source.

Many of the larger banks offer asset depletion mortgages. You may find “portfolio lenders” who offer asset depletion programs, as well.

But keep in mind that loan guidelines vary by lender. You’ll want to shop and compare rates, closing costs, and closing times before making your decision.   

As with all mortgages, it’s important to find an asset depletion loan that offers favorable rates and terms for your situation. Your rate will still affect your monthly payment and have a big impact on your long-term loan costs.

Verify your new rate (Jul 27th, 2021)