Asset Depletion Loan

  

 

 

   An Asset Depletion Loan is a type of mortgage loan that allows borrowers to use their non-liquid assets (such as retirement accounts, savings, stocks, or other investments) as income for qualifying purposes. This option is typically used for borrowers who may have a large amount of savings or investments but lack traditional income from employment or self-employment. Instead of using regular income (such as salary or wages), the lender “depletes” the assets over time to determine the borrower’s ability to repay the loan.

How an Asset Depletion Loan Works:

  1. Qualifying Assets:
    • The borrower’s liquid or semi-liquid assets (like savings accounts, retirement funds, stocks, bonds, or other investments) are considered. The assets must typically be in the borrower’s name, and the lender will assess their value.
  2. Depletion Process:
    • The lender calculates how much income the borrower can generate from their assets by depleting them over time. For example, the lender may take the total value of the assets and divide it by a certain number of months or years (depending on the lender’s formula).
    • A common formula is taking the value of the assets and dividing by 240 months (20 years), which is often used in calculating the monthly income that will be attributed to the borrower.
    • For example, if a borrower has $500,000 in assets, the lender might calculate income of $2,083 per month ($500,000 ÷ 240 months = $2,083). This income would then be used in the underwriting process to qualify for the mortgage.
  3. Additional Requirements:
    • Liquid assets: Assets need to be easily accessible or liquid (i.e., they can be easily converted to cash). Non-liquid assets (like real estate or other property) are usually not included in this calculation.
    • Documentation: The borrower must provide documentation showing the assets are available for depletion, such as bank statements, investment account statements, or retirement account balances.
  4. Use for Qualification:
    • This method is often used for retired individuals, those with significant savings but no regular income (such as pensioners or those with investments), or borrowers who do not have substantial income but have accumulated wealth over the years.
  5. Debt-to-Income (DTI) Calculation:
    • The income generated by the depletion of assets is factored into the borrower’s debt-to-income (DTI) ratio, which is a critical factor in determining mortgage eligibility. The DTI ratio is the proportion of the borrower’s monthly debt payments compared to their monthly income. Asset depletion income can help reduce the borrower’s DTI ratio, potentially improving their chances of loan approval.

Advantages of an Asset Depletion Loan:

  1. Qualify Without Traditional Income:
    • Borrowers who may not have regular income streams, such as retirees or those with irregular income, can still qualify for a mortgage loan by leveraging their assets.
  2. Access to Mortgage Financing:
    • This option opens up mortgage opportunities for those with significant savings but who may not qualify based on typical employment or self-employment income.
  3. Flexible for Retirees:
    • Retirees who may not have a consistent paycheck but have significant retirement funds can still use their assets to qualify for a loan.
  4. Low Risk for Lenders:
    • Since the borrower has sufficient assets to back the loan, it reduces the risk to the lender. This can make the loan more attractive compared to some other forms of financing.

Disadvantages of an Asset Depletion Loan:

  1. Limited Eligibility for Asset Types:
    • Not all assets can be used in the calculation. Non-liquid assets, like real estate or non-marketable investments, are generally excluded. Only liquid or semi-liquid assets like cash, retirement accounts, stocks, and bonds are considered.
  2. Larger Down Payments:
    • Since the borrower is relying on assets instead of income, they may still be required to make a larger down payment to compensate for the lack of regular income.
  3. Limited Loan Amount:
    • The amount a borrower can qualify for may be limited to the amount of assets they have available for depletion. If assets are not sufficient, the borrower may not be able to secure a large loan.
  4. Shorter Loan Terms:
    • The monthly depletion income is calculated based on a limited number of years (e.g., 20 years). As such, the amount of income generated from the assets may not be enough to qualify for a larger loan with a longer term.

When to Consider an Asset Depletion Loan:

  • Retirees: Retired individuals who have significant savings or investments but no regular income stream from employment.
  • Self-Employed Individuals: Self-employed people who might have fluctuating income and may struggle to document traditional income but have substantial assets.
  • Individuals with High Net Worth: Those with substantial assets but no salary or wages can use their wealth to qualify for a mortgage without needing regular income.

Example of Asset Depletion Loan:

Let’s say you have $1,000,000 in liquid assets (like a mix of cash, retirement accounts, and investments). The lender may apply a standard formula to deplete this amount over 240 months (20 years), which gives you a monthly income of approximately $4,166.67 ($1,000,000 ÷ 240 months = $4,166.67). This income is then used in the underwriting process to determine how much of a mortgage you can qualify for.

Is an Asset Depletion Loan Right for You?

If you have substantial liquid assets but lack regular income, an asset depletion loan could be an excellent way to access mortgage financing. It can provide opportunities for those who may not qualify under traditional income-based criteria. However, make sure to evaluate your financial goals and the costs associated with using this method for financing. Consult with a mortgage professional to explore whether this loan option fits your specific needs.