How Does Asset Depletion Qualification Work?
Traditional mortgage underwriting generally focuses on recurring income such as wages, self-employment income, pensions, Social Security or investment distributions.
That approach does not always reflect a borrower's actual financial strength.
A borrower may have substantial savings, securities, retirement funds or other eligible assets but intentionally take relatively little recurring taxable income. This is common among retirees and investors, as well as borrowers who have accumulated significant wealth through a business or investments.
Asset depletion programs provide another method of establishing qualifying income.
The lender generally determines the amount of eligible assets available under its guidelines, makes any required reductions or exclusions, and divides the resulting amount over a specified period to establish monthly qualifying income.
The precise calculation depends on the program.
What Assets Can Be Used?
Depending on the lender and program, eligible assets may include funds held in accounts such as:
- Checking and savings accounts
- Money market accounts
- Certificates of deposit
- Stocks and bonds
- Brokerage and investment accounts
- Mutual funds
- Certain retirement accounts
- Other eligible liquid financial assets
Not every asset is necessarily counted at 100% of its current value.
For example, a lender may apply a reduction to certain securities because their market value can fluctuate. Retirement assets may receive different treatment depending on the borrower's age, accessibility of the funds and program requirements.
Assets required for the down payment, closing costs or reserves may also need to be deducted before the remaining assets are used to calculate qualifying income.
The Asset Depletion Formula Depends on the Lender
This is one of the most important characteristics of asset-based qualification.
There is no universal calculation used by every mortgage lender.
One program may use a particular percentage of eligible assets and divide the resulting balance over one period, while another program may use different percentages, different depletion periods or different rules regarding retirement and investment accounts.
Those differences can materially change the amount of qualifying monthly income produced by exactly the same portfolio.
For a borrower with substantial assets, lender and program selection can therefore be just as important as the amount of assets available.
Asset Depletion Can Supplement Other Income
Asset depletion does not necessarily have to be the borrower's only source of qualifying income.
Depending on the program, calculated asset-depletion income may potentially be combined with other eligible income, such as employment income, Social Security, pension income, investment income or other qualifying recurring income.
For example, a borrower may already have sufficient recurring income to support most of the proposed housing payment but need additional qualifying income to meet the lender's debt-to-income requirements. An appropriate asset-utilization program may allow eligible assets to provide that additional calculated income.
This makes asset depletion useful not only for borrowers with little traditional income, but also for borrowers whose documented recurring income does not fully represent their overall financial capacity.
Asset Depletion Is Not a Loan Against Your Investment Account
An asset depletion mortgage should not be confused with borrowing directly against securities or withdrawing all of the assets used in the calculation.
The lender is generally using eligible assets as a method of calculating qualifying income for mortgage underwriting. The assets remain subject to the requirements of the particular program, including any required verification, accessibility and reserve requirements.
The borrower should therefore understand both how the lender calculates the income and what assets must remain available through the loan process.
Who May Benefit From Asset Depletion Qualification?
Asset depletion can be particularly useful for financially strong borrowers whose wealth and ability to make the mortgage payment are more readily demonstrated through assets than through conventional employment income.
Examples can include:
- Retired or semi-retired borrowers
- Investors with substantial brokerage portfolios
- Business owners with significant accumulated assets
- Borrowers living primarily from investments
Borrowers intentionally taking limited distributions from retirement or investment accounts
Borrowers with substantial assets but complex traditional income documentation
The purpose is not to avoid legitimate income qualification. It is to use an underwriting method specifically designed for borrowers whose financial capacity is better demonstrated through their assets.
Why Comparing Asset Depletion Programs Matters
Two lenders looking at the same borrower can potentially calculate substantially different qualifying income.
One may accept an asset type that another excludes. One may apply a larger reduction to investment assets. Another may use a different depletion period or have more favorable treatment of retirement funds.
The loan amount, property occupancy, credit profile, age of the borrower, asset composition and amount needed for closing or reserves can also affect which program produces the better result.
That is why we work with multiple wholesale lenders rather than just one. We evaluate your specific situation, compare the available programs, and find the financing option that best fits your transaction.