It may sound like a champagne problem, but it’s a real dilemma: You can have a lot of money in the bank and you still can’t qualify for a home loan. If you’re a high-net-worth borrower who is asset-rich but you don’t earn a traditional income, you might struggle to qualify for a traditional mortgage. But with one type of mortgage, there’s hope.
With an asset-depletion mortgage, lenders look at your bank accounts, investment portfolios and retirement savings to determine whether you can repay your mortgage, so you don’t need to provide employment verification or a conventional income paper trail.
Key Takeaways:
- Asset-depletion mortgages enable you to qualify for a home loan using your savings and investments instead of traditional documented income.
- Lenders typically divide your total qualifying assets by 360 months (a 30-year loan term) to calculate a monthly income for qualification purposes.
- These non-qualified (non-QM) mortgages are a good fit for retirees, entrepreneurs and high-net-worth individuals who have significant assets but limited documented income.
- With asset-depletion mortgages lenders still follow general credit and borrowing guidelines, and borrowers can expect to make larger down payments and pay higher interest rates (generally .5% – 2%) than they would with conventional loans.
What Is An Asset-Depletion Mortgage?
An asset-depletion mortgage is a non-qualified (non-QM) loan that allows high-net-worth borrowers who are asset-rich to qualify based on their accumulated wealth rather than traditional documented income. Some lenders might offer this as a portfolio loan, meaning they originate and service it on their books.
For many Americans, obtaining a mortgage typically requires demonstrating conventional income sources, such as pay stubs, W-2s and tax returns. But if you’re retired, self-employed with significant write-offs or living off your well-earned investments, an asset-depletion loan can help secure financing for a home purchase.
In other words, borrowers who might not otherwise qualify for a conventional loan because they don’t earn enough verifiable income on paper can put their assets to work for them – without having to liquidate their wealth.
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How Asset-Depletion Mortgages Work
An asset-depletion mortgage involves your lender counting your liquid assets – including checking and savings accounts, stocks and retirement accounts – as qualifying income to obtain a home loan.
Here’s the basic calculation most lenders use:
Total qualifying assets / 360 months (30-year loan term) = Monthly qualifying income
Here’s an example: Take a business owner who writes off substantial expenses, showing only $45,000 in taxable annual income. However, their total liquid assets are $1.2 million.
On a 30-year loan, you’d divide the total assets of $1.2 million by 360 months for a total monthly qualifying income of $3,333. But once their documented $45,000 annual income ($3,750 per month) is added into account, the total qualifying income now jumps to $7,083 per month, enabling them to qualify for a much larger loan than their tax returns alone would support.
Some lenders use different loan terms (ranging from 60 to 120 months), which can significantly impact your qualifying income. A shorter divisor means higher monthly income on paper, making it easier to qualify for a larger loan.
Qualifying Assets
Lenders typically accept the following liquid assets for an asset-depletion mortgage:
- Checking and savings accounts
- Certificates of deposit (CDs)
- Money market accounts
- Publicly traded stocks, bonds and mutual funds
- Retirement accounts: 401(k)s, IRAs, etc.
Liquid assets that lenders typically don’t include in their formula include real estate equity, business-owned assets, foreign assets, personal property (such as cars or jewelry), and private investments, including private equity stakes or business-owned equity.
How Much Of These Assets Qualify With Lenders?
Lenders often count 100% of liquid assets, including checking accounts, savings accounts, CDs and money market accounts.
For stocks, bonds, mutual funds, and other brokerage accounts, lenders typically partially value them at 70% to 80% of their current market value. When it comes to retirement accounts, lenders usually count 70% of the value, but this percentage may vary depending on the borrower’s age and potential for early withdrawal penalties.
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Who Should Use An Asset-Depletion Mortgage?
Here’s a closer look at the kinds of high-net-worth borrowers who’d get the most benefit from this type of non-QM loan if they don’t qualify for a traditional mortgage.
Retirees
If you’ve spent decades building your nest egg, you might have substantial retirement savings but limited monthly income. Traditional lenders typically won’t approve mortgages for retirees living solely on Social Security or modest pension payments, even when they have millions in investment accounts.
Self-Employed Professionals And Business Owners
Self-employed professionals often use business deductions that reduce their taxable income. A successful business owner might show only $50,000 in adjusted gross income but have a seven-figure portfolio. Traditional loan underwriting penalizes this tax strategy, but asset-depletion loans look past the tax returns.
High-Net-Worth Individuals
If you live off dividends, sold a business at a significant profit or inherited substantial wealth, you might not need a salaried job with a regular paycheck. Chances are, you’ve put your money to work for you in income-producing assets and have a decent amount of cash at your disposal.
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Are Asset-Depletion Mortgages A Last Resort For A Loan?
Some might wonder whether asset-depletion loans are just a last-ditch effort for a mortgage once you’ve exhausted all other options. That’s not necessarily the case, says Kimber White, president of the National Association of Mortgage Brokers, a trade group representing independent mortgage brokers.
“Asset-depletion [loans] shouldn’t be viewed as a last resort,” White says. “However, conventional loans typically offer better rates, so if the individual qualifies conventionally with adequate income documentation, that’s usually the better choice financially.”
Asset-Depletion Mortgage Requirements
While asset-depletion loans offer some flexibility in income verification, lenders still follow general credit score and borrowing guidelines to protect their investments and ensure that buyers can repay the loan.
Borrowing Guidelines For Asset-Depletion Mortgages
| Minimum Requirements | General Standards (Vary By Lender) |
|---|---|
| Credit Score | 680 to 700+ |
| Down Payment | 15% to 20%+ (second and investment homes) may require higher down payments) |
| Loan Limits | Vary, but typically exceed conforming loan limits |
| Cash Reserves | 6 – 12 months of mortgage payments in liquid assets |
| Property Type | Primary residence, second home or rental property |
You’ll notice some of these requirements are more stringent than those for conventional or government-backed mortgages. That’s because asset-depletion loans are riskier for lenders, and they want to recoup their investment if you default and go into foreclosure.
Each non-QM lender has different borrowing requirements, so make sure you shop around with multiple companies to compare offers, White recommends. Working with a mortgage broker can help simplify the process.
“A consumer should work with a mortgage broker who specializes in non-QM lending,” White advises. “They have established relationships with numerous non-QM lenders and can quickly match borrowers with the right program.”
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Pros And Cons Of Asset-Depletion Mortgages
Pros
- No traditional income documentation required: You won’t need pay stubs, W-2s or federal tax returns to verify your income. This saves time and eliminates hassle if you earn income in nontraditional ways.
- Leverages existing wealth: Instead of liquidating investments to buy a home with cash, you maintain your investment strategy while still being eligible to finance a home purchase.
- Flexible borrowing rules: These loans consider your overall financial situation rather than focusing solely on your monthly income.
- Preserves tax strategy: Self-employed borrowers and business owners don’t need to change their tax planning to qualify for a mortgage.
- Available on multiple property types: As with conventional options, you can use asset-depletion loans for primary residences, second homes and investment properties. Most government-backed loans are restricted to primary residences.
Cons
- Steeper interest rates: Asset-depletion mortgages typically come with higher mortgage rates that are 0.5 – 2.0 percentage points above conventional loan rates, in order to offset the increased risk to non-QM lenders.
- Larger down payments: You’ll need more cash up front compared to conventional or government-backed loans, which could mean you’ll need to liquidate some investments if you don’t have the cash on hand.
- Limited lender options: Not all mortgage companies offer these types of programs, so you’ll need to find a non-QM lender. This could limit your options.
- Stricter credit requirements: To qualify, you’ll need a solid credit history and a higher credit score than you would for other mortgage options – again, due to the higher lender risk.
How To Apply For An Asset-Depletion Mortgage
Applying for an asset-depletion loan follows a timeline similar to most other mortgage types, typically taking 30 – 45 days from application to closing. The primary difference in the process lies in how lenders assess your ability to repay.
Here are the steps to follow to apply for an asset-depletion loan.
- Shop around with a few non-QM mortgage lenders to find out which offer asset-depletion mortgages. Compare interest rates, loan terms, minimum qualifications and closing timelines to evaluate which lender is right for your needs.
- Provide recent statements for all your qualifying accounts that you want the lender to include in the calculation. You’ll typically need to provide 60 – 90 days’ worth of statements to verify that your asset accounts are stable and not from temporary transfers.
- Respond to any inquiries from the underwriter, who will evaluate your credit history, debt-to-income ratio, cash reserves and other financial information – and may ask for additional documentation. An appraisal will also be ordered to verify the home’s market value.
- Maintain your asset levels throughout the mortgage approval process. Large withdrawals or transfers can derail your approval and trigger additional documentation requests.
- Once you get the green light from your lender, you’ll close on your mortgage and home purchase.
FAQ
The Bottom Line: High-Net-Worth Borrowers Have Options
If you don’t qualify for a conventional mortgage loan, an asset-depletion mortgage might be your best option. Suppose you’ve built substantial savings through decades of hard work, smart investing or successful business ownership. In that case, an asset-depletion loan offers you a path to homeownership without penalizing you for not having traditional income on paper.
Of course, you’ll have trade-offs with this type of loan: larger down payments, higher interest rates and more stringent credit requirements. But for the right high-net-worth borrowers – typically retirees, entrepreneurs or investors – an asset-depletion loan can fill a home financing gap that traditional mortgages aren’t equipped to handle.
Deborah Kearns
Deborah Kearns is an award-winning independent journalist with more than 15 years of experience covering real estate, mortgages and personal finance. Her work has appeared in the Wall Street Journal, Kiplinger, U.S. News & World Report, Quartz, CNN, Forbes, Fortune, Newsweek, The Associated Press and dozens of other outlets. She previously led content and communications at a Top 15 national mortgage company and held writing and editing roles at Bankrate, NerdWallet, LendingTree and RE/MAX. She holds a bachelor's degree in journalism from the University of Florida and a master's degree in public relations from Ball State University.
