ASSET DEPLETION
Essential Elements

An Asset Depletion Purchase Loan is a type of mortgage that allows borrowers to qualify for a loan based on their liquid assets, rather than traditional income documentation. It’s often used by individuals who are asset-rich but have irregular or insufficient income, such as retirees or high-net-worth individuals. Here are the essential elements of such a loan:

Assets in Lieu of Income
– Primary Feature: Borrowers use their liquid assets (such as savings, investments, retirement accounts) to demonstrate their ability to repay the loan. These assets are “depleted” over a set period (typically 30 years) to calculate an assumed monthly income.
– Asset Types: Common assets include cash in savings accounts, stocks, bonds, mutual funds, retirement accounts (depending on lender rules, often with restrictions), and sometimes vested restricted stock units (RSUs).
– Exclusions: Illiquid assets such as real estate or business equity typically don’t qualify.

Depletion Formula
– Asset Calculation: Lenders will divide the total value of the qualifying liquid assets by a specified number of months (often 360 for a 30-year mortgage) to arrive at a monthly “income” figure.
– Retirement Accounts: If the borrower is below a certain age (usually 59½), lenders may apply a penalty to retirement account balances to account for early withdrawal penalties and taxes.

Loan-to-Value (LTV) Requirements
– Lenders may impose stricter LTV ratios on asset depletion loans, requiring larger down payments. For example, a lender may cap the loan at 70-80% of the property’s value, depending on the overall risk profile.  

Credit Score
– Despite focusing on assets rather than income, borrowers still need a strong credit score, often higher than the minimum required for traditional mortgages. Lenders typically expect a score in the 700+ range.

Reserves Requirement
– Borrowers may be required to maintain a certain amount of assets as reserves, beyond what is depleted to qualify for the loan. This reassures the lender that the borrower has additional cushion to cover payments in case of unexpected expenses.

Interest Rates
– Interest rates on asset depletion loans are often higher than on traditional loans, reflecting the additional risk to the lender. However, competitive rates may still be available to borrowers with strong credit scores and significant assets.

Documentation of Assets
– Borrowers must provide detailed documentation of their assets. This typically includes bank statements, brokerage account statements, and retirement account summaries going back several months. Lenders will verify the liquidity and ownership of these assets.

No or Limited Income Verification
– Unlike standard mortgages that rely heavily on W-2s, tax returns, or pay stubs, an asset depletion loan may require little or no income verification. The emphasis is on the total value of the assets being used for qualification.

Loan Term
– Asset depletion loans are available in different terms, though 15- and 30-year fixed or adjustable-rate terms are common.

An asset depletion purchase loan is ideal for those who have significant liquid assets but don’t show a steady income stream, like retirees or entrepreneurs. The key is the lender’s calculation of a “depleted” income stream from available assets and the borrower’s ability to meet the credit and asset verification requirements.