What is an asset depletion mortgage?
Short Answer:
An asset depletion mortgage is a type of home loan that allows borrowers to qualify based on their liquid assets rather than their income. The mortgage lender calculates a hypothetical income stream from the borrower's assets to determine their ability to repay the loan.
Longer Answer:
Years ago, I had a client who had recently retired but hadn't started taking consistent income from their retirement account. The client wanted to buy a home with a mortgage, but without consistent income, they were being denied. Luckily, the client had a significant amount of money in brokerage and retirement accounts. Using these accounts, we came up with income to qualify for the mortgage via an asset depletion.
In this blog post, we'll explore what an asset depletion also know as asset dissipation mortgage is, who it benefits, and how it works.
What is an Asset Depletion Mortgage?
An asset depletion mortgage is a unique type of home mortgage loan that allows borrowers to qualify based on their liquid assets rather than their income. This mortgage is particularly beneficial for individuals who have significant savings or investments but may not have a consistent income, such as retirees, self-employed individuals, or those living off investment returns.
How Does Asset Depletion Work?
The process of qualifying for an asset depletion mortgage involves the mortgage lender calculating a hypothetical income stream from your liquid assets. Here's a simplified breakdown of how it works:
- Asset Evaluation: The lender will assess your liquid assets, which can include savings accounts, investment portfolios, retirement accounts, and other easily accessible funds. Lenders will subtract from bank balances any funds needed for down payment and closing costs for the purchase of the subject property.
- Depletion Calculation: The lender will then use a specific formula to determine how much income these assets could generate over a set period, typically the term of the mortgage. (120 to 360 months) This hypothetical income is used to evaluate your ability to repay the loan.
- Loan Approval: If the calculated income meets the lender's requirements, you can qualify for the mortgage even without a traditional income stream.
Who Can Benefit?
Asset depletion mortgages are ideal for:
- Retirees: Individuals who have substantial retirement savings but no longer earn a regular income.
- Self-Employed Individuals: Those who may have fluctuating income but possess significant assets.
- Investors: People who live off investment returns and have considerable investment portfolios.
- High Net-Worth Individuals: Those with substantial liquid assets but minimal documented income.
What are the Advantages of Asset Depletion Mortgages?
- Flexibility: Allows individuals with significant assets but irregular income to qualify for a mortgage.
- Leverage Assets: Utilizes your existing assets to secure a loan without needing a traditional income.
- No Distributions Required: Asset depletion mortgages do not require the borrower to set-up a regular distribution to use income.
What are the Considerations of Asset Depletion Mortgages?
While asset depletion mortgages offer numerous benefits, there are some considerations to keep in mind:
- Possinble Higher Interest Rates: These loans may come with possible higher interest rates compared to traditional mortgages.
- Complex Qualification Process: The calculation and qualification process can be more complex and may require detailed documentation of assets.
- Limited Availability: Not all lenders offer asset depletion mortgages, so you may need to shop around to find one that does.
Conclusion
An asset depletion mortgage can be an excellent solution for individuals with substantial assets but irregular income. By leveraging your liquid assets, you can qualify for a mortgage and secure the home of your dreams.
If you have questions about an asset depletion or asset dissipation mortgage, please reach out at teamjd@mainstreethl.com
These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.
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