You’ve spent decades building a strong financial foundation. Your investment portfolio has grown, your 401(k) or IRA is well funded, and you’ve built substantial savings. Yet when you apply for a traditional mortgage, lenders still need to evaluate your qualifying monthly income. This can be challenging if you’re retired, between jobs, or relying mainly on investments and retirement savings rather than a regular paycheck.
This is where an asset depletion mortgage can step in. Also known as an asset qualifier or asset utilization loan, a home loan can be approved based on your assets rather than your monthly income. Here’s a look at how it works and how you can qualify.
What Is an Asset Depletion Mortgage?
An asset depletion mortgage is a type of nontraditional home loan that allows qualified borrowers to use their financial assets to demonstrate their ability to repay the loan. Instead of relying solely on traditional employment income, lenders calculate qualifying monthly income based on eligible assets, such as savings, investment accounts, and retirement funds. This approach can be particularly helpful for retirees, high-net-worth individuals, and borrowers with substantial assets but limited traditional income.
Asset-based income calculations are available through certain conventional mortgage programs as well as non-qualified mortgage (non-QM) programs. Conventional loans must follow applicable agency guidelines, while non-QM lenders may offer different methods for evaluating eligible assets and calculating qualifying income. Requirements vary by lender and loan program.
Demand for Asset Depletion Mortgages
Demand for asset depletion loans is growing as borrowers with high net worth and low conventional income seek financing. Retirees, business owners, and investors are demanding loans that incorporate their net worth instead of their paycheck. Among the biggest reasons:
- Increasing retiring population: Homebuyers begin retirement with significant savings but no regular income.
- Increase in self-employment: Often, business owners claim less taxable income after spending money on expense deductions, despite having high personal wealth.
- Investment-intensive portfolios: Most people want to hold onto their assets, rather than sell and pay capital gains tax.
- Diversifying non-QM offerings: Lenders are adding more flexible programs for the everyday borrower.
As borrowers’ financial situations become more diverse, asset-based mortgage qualification offers a flexible financing option for homebuyers with substantial assets who may not rely on traditional employment income.
How the Asset Depletion Calculation Works
The exact process varies from lender to lender; it is a fairly simple calculation: The total value of your eligible assets is available to you, minus the money you will put forward towards a down payment, the closing costs, as well as the one or two months of reserves the lender demands. This is then divided by several months-sometimes 360, which equates to a 30-year mortgage, and sometimes a shorter period.
For example: You have $1,500,000 in qualified assets, of which you want to withdraw $300,000 to use for a down payment and closing costs. Taking the remaining $1,200,000 and dividing it by 360 months results in a qualifying income of approximately $3,333 per month. You can use that amount on its own or with additional income from Social Security, rental income, pension income, etc., to qualify with your lender.
Note that this is only a qualifying calculation, and you are not actually withdrawing from any accounts on a monthly basis, and your assets are still yours.
Who Is a Good Candidate?
Asset depletion loans are intended for borrowers who have high net worth but whose documented income does not match it. Typical borrowers include:
- Retired: No longer working and earning a small amount from Social Security or a pension, but have large retirement accounts.
- Self-Employed: Business owners whose tax returns reveal significantly lower income after deductions, despite a relatively high net worth.
- Investors and high-net-worth individuals: Borrowers who hold most of their wealth in their brokerage accounts, who get fluctuating income.
- Between jobs or career switchers: Borrowers who have left employment, are taking a sabbatical, or switching careers.
- Former Seller of a Business: Exiting owners who have cashed out and do not yet have their next income source.
Typical Qualification Requirements
Since these loans are coming from non-QM lenders, there is a lot of variation. Most programs, however, will share some general requirements:
- Credit score: Many programs, at least, need scores in the mid-600s to low 700s; you’ll get better rates with higher scores.
- Down payment: Typically, you’re putting down at least 20 percent on your primary residence. You may need to put more down for a second home, or if it’s an investment property.
- Asset seasoning: The shorter the time period your money has been in your accounts, the better. Most lenders prefer to see that your money has been in your account for at least 60-90 days-or longer for some accounts.
- Reserves: You may require extra liquid reserves after closing to cover 2 to 4 months of mortgage payments.
- Proof: The current two- to three-month statement for all accounts you want to utilize.
- Debt-to-income ratio: Your monthly payments, including the new mortgage, must be within the lender’s maximums compared to the income you qualify for.
Benefits of an Asset Depletion Mortgage
THE BEST PART: FLEXIBILITY. Purchase financing without the need to liquidate investments and potentially realize capital gains, thus preserving long-term growth opportunities. Documentation may be simpler compared to traditional income-based loans, with potentially faster approval due to fewer employment history requirements and less extensive review of business tax returns.
It also allows you to keep your retirement savings invested, potentially benefiting from tax-deferred growth rather than taking large distributions that could push you into a higher income tax bracket.
Important Considerations
There are some trade-offs to these loans, which are important to know about. Interest rates on non-QM loans are generally higher than the rates on conforming loans because of the non-QM design and the greater risk assumed by the lender. Certain programs may impose prepayment penalties or require a larger down payment. The assessment of your assets as income can be conservative, requiring a sizable portfolio.
It is also important to consider the purchase in light of your full financial plan. Your down payment will lower your balance by investing some of your wealth. Be sure you leave enough in cash for taxes, emergencies, and ordinary living expenses.
Tips for Improving Your Chances of Approval
Get ready for a smoother experience: Streamline your account statements early and don’t transfer big amounts of money between accounts right before applying, since unexplained transfers can result in more documentation requests. Check your credit report for inaccuracies and try to keep your debt-to-income ratio as low as possible. Lastly, find a lender who specializes in non-QM lending and is willing to compare your options across multiple asset depletion programs.
Work With an Experienced Mortgage Team
Every borrower’s situation is unique, and guidelines on asset depletion can differ significantly depending on the lender. When you work with a knowledgeable mortgage expert, we’ll help you identify which of your assets will work, how they will be assessed, and which program aligns with your objectives.
Our Mission at Reliance Financial is to provide customers with access to the flexible and affordable financing solutions designed around what they can actually afford to spend – instead of just what they earn. When you’re ready to learn just how far your assets can take you, contact us today.
FAQs
Can I borrow against 401k, IRA, or 403(b) money?
Yes, nearly all lenders will allow you to borrow against your 401(k), IRA, and 403(b) accounts. They tend to use a lower percentage of your balances-normally 60% to 70%-to account for taxes and penalties that apply to early withdrawals.
How is qualifying income calculated?
Lenders will take your down payment, your closing costs, and any reserves required by the lender from your total eligible assets. They will then take that total and divide it by a set number of months, typically 360. In the example above, $1.2 million divided by 360 months results in about $3,333 a month of qualifying income.
Do I need to sell the investments or take the money out?
No. Your assets are solely for determining income for program qualification; we do not require that you liquidate assets or fund withdrawals. Your portfolio will remain invested to mitigate capital gains taxes, but the cash needed for the down payment and reserves will have to be set aside.
What Credit Score and Down Payment Are Usually Needed?
Various criteria may include a credit score in the high 600s or low 700s with 20% or more down, although requirements can differ among lenders. With a higher credit score and larger down payment, you could qualify for a more competitive rate and terms.
Can I combine asset depletion with income?
If you have retirement income such as Social Security or a pension, can I use that as part of my asset-based income? A: Yes. Most lenders will let you add Social Security, pension, annuity, and rental income together with your asset-based income.
Are interest rates higher than conventional loans?
In most cases, yes. As non-QM products, asset depletion loans tend to have a slightly higher interest rate than traditional conforming loans. But most borrowers find that the benefit of the cash flow, more straightforward documentation, and more investment flexibility is well worth the rate difference.
