Loan Programs > Bank Statement Loans > Asset Depletion Loans
What is an Asset Depletion Loan and How Does It Work?
While traditional mortgages rely on income to qualify buyers for a particular loan amount, asset depletion loans use other types of assets to validate a mortgage amount. Whether you have CDs, stocks, investments, or other assets, there’s likely a way to leverage it into a home loan.
How Does An Asset Depletion Loan Work?
Asset depletion loans, also known as asset-based loans or asset dissipation loans, are similar to other, more traditional home loans, with one key difference: your qualifying income. When you apply for a home loan, lenders look at your income to determine the amount of a loan you could reasonably take on. For decades, the majority of loans were qualified using W2 salary income.
Thankfully, lenders have evolved to accommodate more income types. These can range from 1099 contractors, freelancers, self-employed income, and small business owners. And they accept alternative assets to calculate your loan qualification.
The process to get a loan will be similar to other loan processes. Reviewing your assets will be a key part of determining the amount of loan you are allowed to borrow. When you apply for the loan, you’ll be asked to provide documentation on your asset. The types of documentation will depend on the assets you have available.
Once you have gathered all the documentation on your assets and their value, the lender will use that total amount to validate the amount of monthly payments you can comfortably make with a loan.
A mortgage broker with deep experience in non-QM loans will help you navigate exactly what assets should be used and how you can strategically choose a loan program for your goals.
What Counts As An Eligible Asset?
The options in qualify assets for an asset depletion loan are wider than you think. Lenders review a variety of assets to help assess your loan qualification. Here’s an overview of the types of assets you can use to qualify:
Liquid Assets
Accounts like your checking, savings, and money market accounts can be used to qualify your loan.
CDs
Investment Accounts
If you have stocks, bonds, or mutual funds, lenders will review their value and use approximately 70-80% of their value to contribute to your overall loan qualifications.
Retirement Accounts
Lenders can accept accounts like a 401k or IRA to help determine the assets you have available to pay off a loan. Most lenders will calculate about 70-80% of the value of these accounts to include in your qualification.
Real Estate Equity
If you already own other property, whether its residential, commercial, primary use, or rent houses, you can use the equity in these properties to qualify for an asset depletion loan.
Business Ownership
Owning a piece (or the entirety) of a business can help you qualify for a home loan. The lender will expect to review founding documents to verify your percentage of ownership as well as other financials to determine your qualifying loan amount.
Schedule an Asset Review With An Experienced Mortgage Broker
Using a mortgage broker means you have the catalogs of dozens of mortgage lenders available to you. Mortgage brokers act as personal shoppers, reviewing your specific needs and connecting you with the ideal lender through a consultative approach. To see if you have the assets needed to qualify, talk to Becky Watkins about starting your loan journey.
How Assets Are Calculated For Mortgages
The calculations to qualify a person for a mortgage with assets can vary from lender to lender. The details and percentages can change, but the general process of calculating the qualifying assets is the same.
Your lender will take the total value of your assets, adjusted for what they are allowed to count as viable income to pay the loan.
For instance, the total amount in a savings account would count at 100%. If you have $25,000 in a savings account, the lender would count the full $25,000 into your total assets.
If you have other account types that technically aren’t liquid cash, like a 401k, IRA, or stocks, they will calculate somewhere between 70 and 80% of the total value and add that to your total assets. For example, if you have $500,000 worth of stocks, the lender could assume 80% of that is viable for the loan qualification. That means they would add $400,000 to your total assets to qualify you for the loan.
$500,000 X .8 = $400,000
Once the lender has reviewed all your asset types, these will be added together to get your total asset amount. This number will then be divided by 360. This is the total number of months you’ll be paying the loan (12 payments per year over 30 years).
The number they get from this calculation will give them a rough idea of what your income/assets could cover in a monthly mortgage payment.
Benefits of Using An Asset Depletion Loan
Many borrowers are drawn to asset depletion loans for a variety of reasons. A large portion of borrowers choosing this loan type tend to be retirees, or self-employed individuals who have nontraditional means of generating income.
The main benefits of using as asset depletion loan are:
Qualify for a loan without a 9-5 job
Utilize non-liquid assets to qualify for a loan
Use your ownership in a business entity to qualify for a loan
Things To Consider About Asset Depletion Loans
There are many attractive features when it comes to asset depletion loans. While there’s many reasons to use one, some people may be better off using other loan programs, depending on your income, credit, short-term financial goals, your income type, and the type of assets you have.
Not all retirement accounts will be counted
Depending on your are and the account type, some retirement accounts may not count. Others may count towards your total, but do not allow for 100% calculation to be put towards your total assets. Knowing the types of accounts you have and how they count will be simple when you use an experienced mortgage broker.
Lenders generally require good credit
Because this loan type relies on nontraditional income, the credit requires can be higher than more standard conventional loan or FHA Loan requirements. Talk to a mortgage broker about how to strategically plan your mortgage to work with your credit.
Your deplete assets over time
Because you are qualifying with your assets, rather than ongoing income, you will likely be using the value of your assets to pay for your loan. This means the value of your assets will very likely get lower over time. We recommend discussing the long-term affects of an asset depletion loan with your mortgage broker and a financial advisor to make sure you can comfortably make payments for the life of the loan.
Find Your Best Mortgage Options in New Mexico
Working with a loan expert that’s also a real estate agent is kind of a no brainer. Becky will guide you through the loan options you have, help you strategize your short- and long-term goals, as well as hold your hand through the loan process.
FAQs about Asset Depletion Loans
Do banks do asset based loans?
Some banks will offer asset based loan types, but they generally have stricter down payment and credit requirements. Using a mortgage broker means your asset based loan can be shopped through several lenders to find the best deal for you.
What is the interest rate for asset based loans?
Interest rates for any mortgage depend on several factors, including the market, your income, credit, and down payment amount. Depending on the lender you use, some asset depletion loans can require a higher interest rate to compensate for the nontraditional income risk.
How do I verify trust income for an asset depletion loan?
Using your trust to qualify for an asset depletion loan is possible if the trust is verified. Getting a copy of the trust agreement, the trustee’s statement(s), or the trust’s federal income tax returns will likely be required for a lender to verify its amount.
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