ASSET DEPLETION
Loan Guidelines

An Asset Depletion Loan, also known as an asset-based mortgage, is a type of mortgage that allows individuals to qualify for a loan based on their liquid assets rather than traditional income streams like wages or salary. This option is particularly attractive to retirees, business owners, or high-net-worth individuals who have substantial assets but limited or irregular income. Understanding the guidelines for these loans is essential to determining eligibility and securing approval.

Key Features of Asset Depletion Loans 

Asset Conversion for Income
The core principle of an asset depletion loan is the conversion of the borrower’s liquid assets into a form of income for mortgage qualification purposes. Rather than looking at a monthly paycheck, lenders will review the borrower’s available assets and calculate an assumed income stream by “depleting” a portion of the assets over a set period, typically ranging from 240 to 360 months. These assets may include:
– Cash reserves in checking and savings accounts
– Stocks, bonds, and mutual funds
– Retirement accounts (under certain conditions)
– Non-retirement investment accounts

Eligible Asset Types
Not all assets are weighted equally in the calculation process. Lenders typically apply discount factors to various types of assets to account for their liquidity and accessibility. For example:
– Cash: 100% of the value is usually considered.
– Stocks, bonds, and mutual funds: Lenders often calculate 70% to 90% of the account balance to factor in market fluctuations.
– Retirement accounts (such as IRAs and 401(k)s): These may be eligible, but if the borrower is under the retirement age, only a portion of the balance may be considered, typically between 60% and 70%, due to tax penalties for early withdrawals.

Asset Depletion Formula
The general formula for asset depletion varies from lender to lender, but it typically involves dividing the borrower’s total liquid assets by a specified number of months. For example, if a borrower has $2,000,000 in assets, a lender might assume a depletion period of 240 months (20 years), resulting in a monthly income of approximately $8,333.33. This assumed income is then used to calculate the debt-to-income (DTI) ratio, a key factor in determining loan eligibility.

Loan-to-Value (LTV) Ratios
Asset depletion loans usually come with standard LTV guidelines, meaning borrowers must contribute a certain percentage of the property’s value as a down payment. Typically, a 20% down payment (80% LTV) is required, although some lenders might allow for higher LTV ratios if the borrower has particularly strong assets.

Credit Score Requirements
Like most mortgages, asset depletion loans also come with minimum credit score requirements. While these loans are geared toward borrowers with strong financial positions, a solid credit history is still necessary to prove financial responsibility. Many lenders require a minimum FICO score of 680, but higher scores may qualify for better terms and rates.

Debt-to-Income Ratio (DTI)
Even though the loan is based on assets rather than traditional income, lenders still calculate a DTI ratio using the income derived from asset depletion. A typical DTI ratio of 43% or lower is expected, although this can vary by lender.

Documentation and Verification
While asset depletion loans don’t require pay stubs or employment verification, lenders will require detailed documentation of the borrower’s assets. This includes account statements (typically from the last 6 to 12 months) for all accounts used in the asset depletion calculation, proof of asset ownership, and any other documentation verifying the source and accessibility of funds.

Interest Rates and Loan Terms
Interest rates for asset depletion loans may be slightly higher than those for traditional mortgages, reflecting the unique risk profile of borrowers who rely on assets rather than ongoing income. Loan terms are generally comparable to standard mortgage options, with terms ranging from 15 to 30 years.

Benefits of Asset Depletion Loans
– Flexible Qualification: This type of loan provides flexibility for retirees, self-employed individuals, or anyone with significant assets but low or irregular monthly income.
– No Employment Requirement: Borrowers aren’t required to prove employment or steady income, which can be particularly advantageous for those living off investments or retirement funds.
– Leverage Assets: It allows borrowers to leverage their net worth, including liquid and sometimes retirement accounts, without the need to liquidate their assets.

Drawbacks
– Complex Qualification Process: The formula for calculating income based on assets can be complex and varies by lender, which can sometimes make it harder to qualify.
– Higher Interest Rates: Lenders may charge slightly higher rates to offset the potential risk of using assets instead of regular income.
– Restricted Asset Use: Depending on the lender, there may be restrictions on what types of assets can be included or how accessible those assets need to be.

Asset depletion loans are a unique financial tool that caters to borrowers with high net worth and substantial liquid assets but limited income. By converting those assets into qualifying income, lenders offer flexibility to individuals who may otherwise struggle to meet traditional income-based mortgage requirements. However, borrowers must be prepared to navigate a more complex application process, with careful attention paid to the types of assets they can use and how those assets will be valued.