ASSET DEPLETION
Borrower Eligibility

An Asset Depletion Mortgage Loan is a type of loan where a borrower qualifies based on their liquid assets rather than their income from employment. This is particularly beneficial for individuals who have significant assets but may not have a regular, steady income, such as retirees, self-employed individuals, or those with large savings or investments.

With this type of mortgage, lenders calculate an income stream based on the borrower’s liquid assets and use this “depleted” asset value to qualify the borrower for a mortgage. This allows borrowers to secure a home loan even if their income from work is low or nonexistent, as long as they have substantial assets.

Borrower Eligibility for an Asset Depletion Mortgage Loan.
To qualify for an asset depletion mortgage loan, borrowers must meet specific requirements. The main eligibility criteria include the type of assets available, the amount of assets, and other financial factors like credit and debt obligations. Below are the key considerations for borrower eligibility:

Type of Eligible Assets
Only certain types of assets are eligible to be used in an asset depletion calculation. Generally, these are liquid or near-liquid assets that can easily be converted into cash. 

– Cash in Checking or Savings Accounts: Any liquid cash reserves in personal accounts can be used.
– Investment Accounts: These include stocks, bonds, mutual funds, and other investments that can be quickly converted to cash.
– Retirement Accounts (IRA, 401(k), etc.): Retirement accounts can be considered for asset depletion, but only a portion of the total value may be counted. For example, some lenders will only use 60-70% of the value of a retirement account if the borrower is under 59 ½ years old, due to potential taxes and penalties for early withdrawals.
– Certificates of Deposit (CDs): These can be used as long as they are liquid or close to maturity.
– Trust Funds: In some cases, trust funds can be used as an asset source if they are accessible and liquid.

Ineligible Assets
Some types of assets are not considered for asset depletion purposes, such as:
-Real estate holdings (unless liquidated)
– Illiquid business interests
– Personal property (e.g., cars, art, jewelry)

Minimum Asset Requirement
Lenders typically have a minimum asset threshold that must be met to qualify for an asset depletion loan. While the specific requirement varies between lenders, borrowers often need at least $500,000 to $1 million in liquid assets to qualify. The total asset amount needed depends on the size of the loan and the borrower’s other financial qualifications.

Asset Depletion Calculation
Lenders use a specific formula to calculate the income generated from the borrower’s assets. The typical method involves dividing the total value of eligible assets by a predefined period, often 240 months (20 years). The resulting figure is considered as the borrower’s depleted income for loan qualification purposes.

For example:
– If a borrower has $1,000,000 in liquid assets, the lender may divide that by 240 months, resulting in a calculated income of $4,166 per month. This “deemed” monthly income is used to determine the borrower’s ability to repay the mortgage.

The exact depletion calculation can vary depending on the lender’s guidelines and the type of assets involved.

Credit Score Requirements
While asset depletion loans focus primarily on assets rather than income, a borrower’s credit score is still an important factor in determining eligibility. Common credit score requirements include:

– Minimum Credit Score: Most lenders require a minimum credit score of 680 for asset depletion loans. However, some lenders may require a higher score (700 or above) depending on the borrower’s financial profile.

– Higher Credit Scores for Better Terms: Borrowers with higher credit scores (e.g., 720+) are more likely to receive better interest rates and loan terms.

Debt-to-Income (DTI) Ratio
Even with an asset depletion loan, lenders will evaluate the borrower’s debt-to-income (DTI) ratio, but the income used in the calculation will be based on the depleted asset value rather than traditional earned income. The DTI ratio reflects the borrower’s ability to handle monthly debt payments, including the mortgage payment, relative to their income.
– Maximum DTI: Most lenders allow a maximum DTI ratio of 43% for asset depletion loans. However, lenders may allow higher DTI ratios if the borrower has substantial assets or a strong overall financial profile.

Loan-to-Value (LTV) Ratio
The loan-to-value (LTV) ratio is another important factor for borrower eligibility. This ratio represents the loan amount relative to the value of the property being purchased or refinanced.
– Down Payment: Borrowers using asset depletion loans typically need a down payment of at least 20%, though some lenders may require more depending on the size of the loan and the borrower’s financial situation.
– Lower LTV for Higher Loan Amounts: For jumbo loans or larger loan amounts, lenders may require a lower LTV ratio, meaning the borrower will need a higher down payment (e.g., 30%).

Reserves
Lenders typically require borrowers to have additional cash reserves beyond the assets being depleted for qualification purposes. Reserves are funds set aside to cover mortgage payments in the event of financial difficulty.
– 6-12 Months of Reserves: Borrowers are often required to show that they have enough liquid assets to cover 6-12 months of mortgage payments, including principal, interest, taxes, and insurance (PITI). In some cases, reserves may be higher, especially for high-value loans.

Loan Amount
Asset depletion loans are often used for jumbo loans, which are loans that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Borrowers must meet the specific loan limits and guidelines of the lender.

Property Types
Asset depletion loans are available for a variety of property types, including primary residences, second homes, and investment properties. However, eligibility may vary depending on the property type and its intended use.

Borrowers with significant liquid assets but limited or no traditional income are prime candidates for an asset depletion mortgage loan. To qualify, borrowers must demonstrate that they have substantial liquid assets, meet minimum credit score and DTI requirements, and be prepared to make a sizable down payment. By converting assets into an income stream through asset depletion, lenders can help borrowers access financing based on their financial strength rather than earned income. It’s essential to work with a lender familiar with asset depletion loans to ensure the borrower meets all specific guidelines and receives the best possible terms.