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How an Asset Depletion Mortgage Works

How an Asset Depletion Mortgage Works

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience
  • Program Overview
  • Asset depletion mortgages, also known as asset dissipation mortgages, enable borrowers to use liquid assets to qualify for a mortgage.  Asset depletion mortgages are good for borrowers with relatively minimal income or no verifiable employment but significant assets such as funds in a bank, investment or retirement account.  Examples of potentially applicable borrowers include the self-employed, retired (or almost retired) and wealthy.

    The specific mechanics of an asset depletion mortgage vary by lender and program but they generally work the same way.  Lenders use a formula to calculate the income that could be generated by depleting a borrower’s liquid assets over a fixed period of time and use that income to determine a borrower’s ability to qualify for a mortgage.  The term “asset depletion” is used because the lender assumes that the borrower could sell, or liquidate, his or her assets over time to pay for the mortgage.

    The income derived from the asset depletion formula is added to other income the borrower may earn such as employment wages or social security to calculate the debt-to-income ratio the lender applies to determine what size mortgage the borrower can afford.  A borrower may have significant assets but if the lender’s asset depletion formula does not yield sufficient income the borrower may not qualify for the desired loan amount.  Borrower debt-to-income ratios for asset depletion mortgage vary but generally range between 40% and 50%.  Please note that if a borrower generates significant income from his or her assets, such as from dividends, then that income may be subtracted from the asset depletion income so there is no double-counting.  In this scenario, the dividend income is still used to help the borrower qualify but it is not considered part of the asset depletion equation.

  • Great Mortgage IdeaIt is important to highlight that with an asset depletion mortgage the borrower is not actually required to sell any assets over the course of the loan.  Additionally, the borrower is not actually pledging any assets as collateral for the mortgage so they are not tied up or restricted after the mortgage closes
  • What Lenders Offer Asset Depletion Mortgages?
  • The best lenders for asset depletion loans include banks with both mortgage lending and private banking operations that are looking to grow their assets under management such as First Republic or Boston Private.  These banks may offer more significant mortgage rate discounts if you move some or all of your assets to them.  Other asset depletion mortgage lenders include larger, national banks such as Wells Fargo, Citibank, Bank of America and Chase as well as portfolio lenders, which are banks that hold mortgages on their balance sheets instead of selling them. 

    We recommend that you contact multiple lenders in the table below to determine if they offer asset depletion mortgages and to request program requirements and loan terms including your maximum loan amount, interest rate and closing costs.  Loan guidelines and pricing vary by lender so it is important to compare multiple proposals to find the asset depletion mortgage that best meets your needs.

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  • What Types of Assets are Eligible?
  • Asset eligibility varies by lender but in general most liquid assets are eligible. Examples include:

    • Checking / savings accounts
    • Investment account with stocks, bonds, mutual funds, ETFs
    • Money market account
    • Certificate of deposit (CD)
    • Retirement accounts such as 401(k), IRA, SEP, KEOGH may be considered depending on the borrower’s age and any penalty applied for accessing funds in the account.  Some lenders may give a borrower partial or no credit for assets in retirement accounts if the borrower is not of, or near, retirement age
  • Great Mortgage IdeaBe sure to confirm a lender’s account eligibility policy and the value of your eligible assets according to that policy before selecting a lender
  • How Does the Asset Depletion Income Formula Work?
  • There are two basic approaches to determine asset depletion income as outlined below.  Review the examples below and be sure to confirm the approach a lender uses to calculate asset depletion income before moving forward with your application.

  • Approach 1: 
    Borrower eligible net assets divided by 360
    • Approach 1 Example
    • Borrower eligible net assets after down payment and closing costs: $1,000,000
    • Monthly income from asset depletion: $1,000,000 (eligible net assets) / 360 months = $2,778 in monthly income
    • Some lenders may use a variation of this formula and apply a 20% - 30% discount to eligible net assets
  • Approach 2:
    Eligible net assets plus an investment return divided by 85 minus the borrower’s age
    • Approach 2 Example:
    • Borrower eligible net assets after down payment and closing costs: $1,000,000
    • Return on investment applied to assets: 5.0%
    • Borrower age: 65
    • Monthly income from asset depletion: $1,000,000 (eligible net assets) @ 5.0% (rate of return) / 240 (85 - 65 (borrower's age) = 20 years * 12 months per year) = $6,600 in monthly income
    • Please note that calculating the additional monthly income from the assets is similar to calculating the monthly payment for a mortgage.  For example, for $1,000,000 million in assets at a 5% rate of return over twenty years, the monthly income is $6,600.  $6,600 is also the monthly mortgage payment on a $1,000,000 mortgage with a 5% interest rate and 20 year term
    • This approach is beneficial to the borrower because it applies an investment return to the borrower's assets
    • Lenders, however, may use different rates for return on investment which can significantly impact a borrower's asset depletion income
    • This approach is also favorable to older borrowers while being disadvantageous to younger borrowers because it divides the income by a greater number of months
  • Asset Depletion Mortgage Qualification Requirements
  • Typically only owner-occupied loans for primary or secondary / vacation residences are eligible for the program. Some lenders offer asset depletion mortgages for investment properties but they are relatively uncommon. Some lenders may also require a lower loan-to-value (LTV) ratio of 70% as compared to the 80% - 90% maximum LTV ratio for many traditional mortgage programs. Borrowers must typically have a minimum credit score of 620 - 680 to qualify for an asset depletion mortgage. To demonstrate proof of assets, borrowers are required to provide current and historical monthly account statements in addition to standard personal financial documents such as tax returns and pay stubs, if applicable.

  • Am I Required to Move My Assets to the Lender I Use?
  • Most lenders do not require borrowers to move their assets to the lender in order to qualify for an asset depletion mortgage but in many cases borrowers may be able to obtain a lower interest rate by shifting some or all of their assets.  Interest rate discounts vary by lender but the size of the discount usually depends on the amount of money the borrower moves to the lender.

    Use the FREEandCLEAR Lender Directory to find top-rated lenders that offer asset depletion mortgages.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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