Asset Depletion Loans
Asset depletion loans, 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 asset depletion loans 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 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.