What if you could qualify for a mortgage based on your assets, not your income? If you have investable assets of $1 million or more, you’d be considered a high-net-worth individual. With that much money invested, many high-net-worth individuals no longer work traditional jobs – letting their money work for them instead. For the top 5% of the U.S. population, whose average net worth is approximately $1.03 million, leveraging wealth rather than traditional income is the key to financing a new property.
This is where asset depletion mortgages come in. These specialized loans can help you qualify using your assets rather than just your income, making them a perfect fit for wealthy buyers with little to no documented income.
In this guide, we’ll break down how asset depletion mortgages work, who they’re best suited for, and why they’re a smart option for high-net-worth individuals.
What Is an Asset Depletion Mortgage?
An asset depletion mortgage is a type of loan designed for individuals who have significant assets but may not have a steady or traditional source of income. To assess eligibility for these loans, lenders review your assets instead of your income, which is a form of alternative income verification.
Since lenders don’t use traditional methods, like W2s or tax returns, to verify your income, these mortgages fall under the category of non-QM (non-qualified mortgage) loans. These types of loans aren’t required to meet the strict requirements set by the Consumer Financial Protection Bureau (CFPB) and are typically much more flexible for individuals who don’t fit the mold of conventional loan requirements.
How Does an Asset Depletion Mortgage Work?
Simply put, an asset depletion mortgage works by allowing you to qualify for a loan based on their liquid assets instead of relying on traditional income sources. Lenders calculate an “income” figure by dividing your total liquid assets by the number of months in the loan term. We’ll be covering exactly how to determine affordability for an asset depletion loan a little later in this article, but the key term to remember here is “liquid assets” as the assets used must be liquid, unless otherwise stated by a lender.
A liquid asset is an asset that can easily be converted into cash in a short amount of time and without a significant loss in value. Liquid assets include cash, bank statements, stocks, bonds, mutual funds, and other securities, etc.
Who Would be an Ideal Candidate for an Asset Depletion Mortgage?
An asset depletion mortgage is a great option for borrowers with substantial liquid assets but little to no documented income. Ideal candidates include:
- Retirees who have built a significant nest egg but no longer have a regular paycheck.
- Self-employed individuals with fluctuating income but considerable savings or investment portfolios.
- High-net-worth individuals who prefer to rely on their wealth rather than traditional income to qualify for a loan.
- Heirs or beneficiaries with considerable savings from an inheritance or other sources of liquid assets.
Asset Depletion Mortgage Eligibility and Requirements
The requirements to qualify for an asset depletion mortgage can vary depending by lender. Each lender can set their own criteria since asset depletion loans are considered non-QM and aren’t required to follow the CFPB guidelines.
Even though other lenders may have different requirements, we’ve listed what we require for our asset depletion loans at Defy Mortgage below:
- Proof of liquid assets
- No tax returns required
- Minimum FICO score of 620+
- Fixed/ARMs
- Interest-only options
- Up to 80% Max Loan-to-Value (LTV)
- No maximum loan amount
- Only available for primary residences and second home
Keep in mind that exact LTV requirements will depend on specific applicant information, such as credit score, DTI, and other factors, and can be subject to change. For more accurate information regarding fees and terms based on your financial profile, contact us by booking a call with us or giving us a ring at (615) 622-1032.
Required Documents
Similar to qualification requirements, the exact documents you’ll need for the application process will depend on the lender’s policies.
At Defy Mortgage, no income or employment documents are required for our asset depletion mortgages, but you’ll need to provide documentation that verifies the value and accessibility of your liquid assets. Required documents include:
- Bank statements for savings and checking accounts to confirm available cash and reserves.
- Investment account statements detailing stocks, bonds, mutual funds, and other securities.
- Retirement account statements (e.g., IRAs or 401(k)s), if applicable and accessible based on age or withdrawal eligibility. The standard is usually 59.5 years of age and older to use 100% of liquid assets, and 50% of retirement funds for those under 59.5 years, however, this can vary by lender. Be sure to ask your lender for their age or withdrawal eligibility specifics.
- Proof of asset ownership to demonstrate that the accounts and funds belong to the borrower.
How to Calculate Loan Affordability
Calculating loan affordability for an asset depletion loan is fairly simple. All you need to do is take the total value of your liquid assets and divide that by the length of the loan term in months.
For example, if you have $3.6 million in liquid assets and you’re looking to get a mortgage with a 30-year term, you would divide that amount by 360 months. This would result in a monthly “income” of $10,000 and would determine your maximum loan amount.
At Defy, we calculate affordability based on the total value of your liquid assets divided by as little as 60 months, and eligible assets typically include:
- Savings and checking accounts for reserves.
- Investment portfolios, including stocks, bonds, and mutual funds.
- Retirement accounts like IRAs or 401(k)s, depending on the borrower’s age and withdrawal eligibility.
This type of loan offers a tailored solution for those who don’t fit the mold of traditional income-based lending but have assets to meet their mortgage obligations.
Pros and Cons of an Asset Depletion Mortgage
Pros:
- Income flexibility for borrowers with substantial assets but little or no traditional income
- High-net-worth individuals can leverage their savings and investments
- No taxable income is required
- Tailored to borrowers with unconventional finances and unique situations
- A variety of liquid asset types are accepted so these loans are considered flexible (e.g. savings, investments, retirement funds, etc.)
Cons:
- Can have slightly higher interest rate compared to conventional loans
- Real estate or illiquid investments aren’t eligible
- Limited availability
- Portions of savings or investments may be depleted to repay the loan
Asset Depletion Mortgages vs. Conventional Loans
Asset depletion mortgages and conventional loans mainly differ in how you can qualify for them.
While conventional loans rely heavily on documented income, paystubs, and W2s to verify your ability to repay, asset depletion mortgages focus on liquid assets like savings, investments, and retirement accounts. This makes them ideal for retirees, self-employed individuals, or high-net-worth borrowers who don’t have steady income but have substantial wealth.
Conventional loans generally offer slightly lower interest rates and fees but they need to follow strict underwriting criteria, such as debt-to-income (DTI) ratios and credit scores. On the other hand, asset depletion mortgages provide more flexibility at the cost of slightly higher rates and fees, but give non-traditional borrowers an opportunity to qualify.
Asset Depletion Mortgages vs. Asset-Based Mortgages
While asset depletion mortgages and asset-based mortgages were both designed for borrowers with significant assets, the way those assets are used to qualify differs.
Asset depletion mortgages calculate a hypothetical “income” by dividing the borrower’s liquid assets by a set number of months, which is usually the loan term. This method showcases your ability to make payments over time without relying on a traditional income.
In contrast, asset-based mortgages use your assets directly as collateral for the loan and often do not require any income documentation. These loans are more common for high-net-worth individuals looking for large loans or unconventional financing, whereas asset depletion mortgages are tailored for borrowers wanting to qualify based on liquid wealth or “liquid assets”.
Alternatives to an Asset Depletion Mortgage
If you’re a non-traditional borrower looking for financing but don’t quite have the liquid assets for an asset depletion loan yet, you have other options. Below, we’ve listed several non-QM loans that could be a good fit for those who don’t fit the traditional mold:
- Bank Statement Loans: With a bank statement loan, you can qualify for a mortgage using your bank statements. Lenders will review your deposits to determine affordability.
- P&L Loans: Short for Profit & Loss Statement Loan, a P&L loan can help you qualify for a mortgage using your business’ CPA-prepared P&L statements.
- DSCR Loans: Short for Debt-Service Coverage Ratio Loan, DSCR loans allow real estate investors to qualify for a mortgage based on the property’s rental income.
Importance of Understanding Asset Depletion Mortgages
An asset depletion mortgage allows borrowers with substantial liquid assets but limited or no traditional income to secure a mortgage that fits their unique circumstances. Potential borrowers should carefully review the specific requirements and consult with mortgage professionals who specialize in non-QM lending to fully understand how their unique financial situation might qualify them for this type of mortgage.
While asset depletion mortgages provide an alternative path obtaining a home loan, they require thorough documentation and a comprehensive assessment of the borrower’s financial landscape, unique situation and liquid assets. Before deciding on an asset depletion mortgage, it is essential to carefully evaluate the eligibility requirements and consult with a mortgage professional to ensure this option aligns with your financial goals and objectives.
A firm understanding of the nuances of asset depletion mortgages equips borrowers like you with the knowledge needed to successfully navigate this specialized lending option more efficiently. As always, if you have questions, the most important thing that you can do is ask.
At Defy Mortgage, we offer all asset depletion mortgage options, bank statement loans, DSCR loans and more. If you’re ready to take the first step in your home buying adventure, book a call with us or give us a ring at (615) 622-1032 to speak to a mortgage expert.
Asset Depletion Mortgages: FAQs
- What is an asset depletion mortgage?
An asset depletion mortgage is a type of home loan that allows you to use liquid assets to qualify for a mortgage rather than traditional income documents like tax returns, pay stubs or W2s.
- How does an asset depletion mortgage work?
Lenders take the total value of your assets and divide that amount by the number of months in the loan term to determine your monthly “income” and how much you can afford.
- Who is eligible for an asset depletion mortgage?
Anyone with significant assets can be eligible for an asset depletion mortgage, including, but not limited to:
- Retirees
- High-net-worth individuals
- Self-employed individuals
- Business-owners or entrepreneurs
- Heirs or beneficiaries
- Anyone with substantial liquid assets
- What types of assets can be used for an asset depletion mortgage?
Eligible assets typically include:
- Savings and checking accounts.
- Investment portfolios, including stocks, bonds, and mutual funds.
- Retirement accounts like IRAs or 401(k)s, depending on the borrower’s age and withdrawal eligibility.
- Do I need to sell my assets to get an asset depletion mortgage?
No! You don’t need to sell your assets to get an asset depletion mortgage. Lenders will use the value of your liquid assets to calculate affordability instead.
- Do your assets need to be liquid to get an asset depletion mortgage?
Yes, only liquid assets are eligible, meaning illiquid assets, like real estate, aren’t eligible. A liquid asset is an asset that can easily be converted into cash in a short amount of time and without a significant loss in value. Liquid assets include cash, bank statements, stocks, bonds, mutual funds, and other securities, etc.
- Do asset depletion mortgages require tax returns to qualify?
No, tax returns aren’t required to qualify for an asset depletion mortgage.
- What are the benefits of asset depletion mortgages?
The benefits of asset depletion mortgages are:
- Income flexibility for borrowers with substantial assets but little or no traditional income
- High-net-worth individuals can leverage their savings and investments
- No taxable income is required
- Tailored to borrowers with unconventional finances and unique situations
- A variety of liquid asset types are accepted so these loans are considered flexible (e.g. savings, investments, retirement funds, etc.)