Understanding Asset Depletion Mortgages in a New Light

An asset depletion mortgage offers a unique way for borrowers to qualify for a mortgage without relying on their employment income. Instead, lenders assess the value of the borrower's eligible assets. By adding up all qualifying assets and dividing them by a set number of months, lenders determine a hypothetical cash annuity stream. This amount is then considered as "other income" on the loan application, influencing the borrower's affordability for a mortgage.

For example, imagine you have $1 million in eligible net assets but lack verifiable income as a self-employed individual. In this scenario, an asset depletion mortgage could be the solution. By dividing the $1 million by 240, the lender calculates $4,166 in qualifying "other income" and determines your maximum loan amount accordingly, providing a preapproval letter.

How Asset Depletion Mortgages Function

When traditional employment income may not suffice to qualify for a mortgage, asset depletion mortgages widen the options for individuals, such as retirees with no fixed income or high-net-worth individuals lacking traditional income sources. To begin the qualification process, borrowers need to identify lenders offering this unconventional mortgage type, then furnish details of their assets for assessment. Eligible assets typically include liquid accounts like checking, savings, retirement, investment, and money market accounts.

Notably, lenders may utilize only a percentage of an asset's total value when determining affordability. For example, a lender might consider 70% of a borrower's stock or mutual fund accounts. The total eligible assets are then divided by a specified number of months to estimate monthly income, influencing the maximum loan amount you can borrow.

Deciding on Asset Depletion Mortgages

If you encounter challenges qualifying for a mortgage due to insufficient employment income, an asset depletion mortgage could be an alternative worth exploring. However, substantial qualifying assets are necessary, as lenders typically divide the asset value by 240 or more to determine affordability. For instance, aiming for $2,000 in monthly "other income" would require at least $480,000 in qualifying assets.