Introduction
Asset depletion — a type of Non-QM option also known as “asset dissipation,” helps borrowers get the home loan they need using the assets (not income) they currently have.
In this blog, we’ll explore the details surrounding asset depletion, examining what it is, who it benefits, how it’s used, requirements and more. Let’s dive in.
What Is Asset Depletion?
Asset depletion, in the context of residential mortgages, refers to a method used by lenders to qualify borrowers for a loan based on their existing assets, rather than traditional income sources from employment, etc.
This method is commonly employed when a borrower possesses significant liquid assets but faces challenges meeting the conventional debt-to-income (DTI) ratio criteria for loan approval due to limited or irregular income sources.
With asset depletion, borrowers can:
- Prove they have enough money to cover the loan even without regular income from employment.
- Qualify for a loan simply based on their liquidity (cash, investment portfolios, etc).
However, it’s important to note that using funds from asset depletion does not mean you have to qualify solely based on your liquid assets. You may use it as an additional ‘income’ source on top of any regular income you currently receive.
Who Benefits From Asset Depletion?
- High-net-worth individuals
- Retirees
- Self-employed individuals such as entrepreneurs and freelancers who show low reported income due to write-offs
Using Asset Depletion During The Home Loan Process
In the typical mortgage application procedure, lenders evaluate the borrower’s loan repayment capacity by computing their “debt-to-income ratio.”
This ratio measures the correlation between the borrower’s gross monthly income and their monthly debt obligations, encompassing various financial commitments such as mortgage payments, credit card bills, student loans, among others.
Nevertheless, certain borrowers may possess substantial financial reserves, such as savings, investments, or other readily available liquid assets, which could serve as a means to support the loan repayment even if their regular income is not sufficient to meet the DTI requirements.
Asset depletion allows these “certain borrowers” to use their liquid assets as an alternative means of demonstrating their ability to repay the mortgage.
The Calculation Behind Asset Depletion: How It Works
In an asset depletion analysis, the lender calculates a notional or hypothetical monthly income by dividing the total value of the borrower’s liquid assets (“qualifying income”) by varying years of amortization, at Defy our most aggressive programs simply divide your total qualified assets by 60 months.
For instance, with $2,000,000 in assets over 5 years (60 months), your monthly “income” would be $33,333.
The resulting monthly figure, such as the example above, is then used as “income” for loan qualification or can be added to any regular income; then using this combined income to determine the borrower’s new debt-to-income ratio.
Asset Requirements
Eligible assets typically include one’s most liquid assets:
- Savings and checking accounts
- Investment portfolios: stocks, bonds, mutual funds etc.
But depending upon age, can also include:
- Retirement accounts: IRAs and 401k
If you choose to explore asset depletion options at Defy Mortgage, there are no income or employment documents that are required. Understanding your eligible assets and preparing documentation in advance can help expedite the loan process and help in the avoidance of any confusion.
At Defy Mortgage, we specialize in alternative financing options and provide our borrowers with personalized options to meet their needs. If you’re interested in exploring asset depletion, we offer asset depletion as an option for our borrowers. Let us support you.
If you’re interested in exploring other loan options at Defy, visit our products page. Knowing that every borrower is unique, we offer a range of competitive options to meet our client’s needs. Visit our website to learn more about how we can help.
