The standard home loan terms are not for everybody. Many people have substantial assets but do not appear to make a regular income on paper. That’s where asset depletion mortgage loans enter the picture. These loans were made for people who may not receive a paycheck every two weeks, but still have the financial ability to make monthly mortgage payments. If you’re retired, self-employed, or living off investments, this sort of mortgage might be just what you’re looking for.
This article will explain how asset depletion loans work, who’s eligible, how lenders convert your assets into income, and what to keep in mind before applying. Asset-based financing solutions, like asset depletion loans, provide an excellent alternative for those who might not fit the traditional lending criteria but still have significant wealth to leverage.
An asset depletion mortgage loan is a form of home loan that allows you to qualify for a loan based on your liquid assets rather than traditional income. Lenders know some borrowers have a nest egg they built up and may not have a job income coming in the door. Rather than checking pay stubs or W-2 forms, they scrutinize your bank accounts, retirement funds, stocks, and other financial assets to estimate how much income you could encase through them.
This is a type of loan designed for people with solid financial support to buy or refinance a home, but whose tax returns report little or no income. It fulfills a niche in the mortgage market for borrowers who are financially secure but who don’t have a traditional job. Otherwise, many retirees, entrepreneurs, and early retirees may have a hard time getting approved for a traditional loan, even if they have the means to pay one.
And as more Americans enter into non-traditional income situations, asset depletion loans have gained in popularity. For many who rely on dividends, cash reserve, or trust income, this line of credit helps them get into homes without needing to prove their employment or business income.
These loans aren’t available only to millionaires. They’re meant for the average Joe or Jane who has saved some cash or accumulated wealth by other means. Retirees are one of the most common groups that utilize asset depletion loans. Most people quit working, but may still have pensions, retirement accounts, or investment portfolios at their disposal. Yet, even without a job, they could afford a mortgage based on these assets. Such asset depletion loans are common for other types, as well:
To qualify, lenders generally want to see good liquidity with enough money to cover the loan term, or if not the full term, then a good chunk of it. The assets have to be documented and verified, and you’re still subject to other basic credit and financial requirements, like a decent credit score and reasonable levels of debt.
Instead of your salary or freelance income, lenders look in-depth at your asset portfolio. That can include checking, savings, investment accounts, retirement funds and possibly even annuities or trust accounts. From there, they apply a formula to translate those assets into a type of monthly income.
Here’s how it typically works: the lender sums up all of your qualifying assets and divides them by a standard number of months, 360, or 30 years. That gives them a dollar amount on the other side every month that they can plug into a loan application. So if you have $1.2 million in assets, for example, the lender could divide that number by 360 months and add $3,333 to your monthly income.
Assets aren’t necessarily treated the same way. Retirement accounts, such as IRAs or 401(k)s, are typically only included if you’re of retirement age, for example. To mitigate the effect of market fluctuations, some lenders may only count a percentage of the funds from your investment accounts. Some lenders do not count illiquid assets, like real estate or collectibles.
Every lender has slightly different rules and formulas, so you need to work with somebody who knows how asset depletion loans operate. Some might let you add asset depletion income to other sources of income, such as rental income or part-time work, to make it easier for you to qualify.
If you have lots of assets but not much income, this loan might be a good fit. But it’s not for everyone. You’ll need to consider how much of your assets you’re comfortable tying to a mortgage, and decide whether that’s a prudent move for your long-term goals. It can be a savvy way for someone to ensure their cash flow or put off selling investments.
You should also consider your entire financial picture. Even when you do qualify, consider whether the monthly payments, interest rate and down payment are justifiable in the context of your bigger plan. If applicable, consult a financial advisor or mortgage specialist who specifically knows your scenario.
Why are asset depletion loans gaining traction? They mirror the evolving way we bank. Not every job is 9-to-5 these days, and this loan unlocks the door for a new type of borrower. If that sounds like you, it could be worth investigating this option and finding out whether your assets could be of help to you in securing the home of your dreams, without having to verify your salary.
