Mortgage Underwriting: Asset Depletion
Qualifying for a mortgage loan has gotten more and more difficult since the real estate bubble in the early and mid 2000's lead to the great recession. Many different underwriting techniques that were previously common to see have become less common these days. One such technique, Asset Depletion, is one of those less commonly found in today's mortgage lending community.
Asset depletion is a technique originally designed to allow borrowers who are asset heavy and employment income light to qualify for a mortgage. This technique was especially beneficial for business owners who show low income levels or wealthy individuals with insufficient income or difficulty providing a qualifying employment history.
Today the ability show great amounts of income and several years of history of it tend to dominate what lenders are looking for. However some lenders are willing to use asset depletion techniques to help borrowers qualify for their loans.
Asset depletion is a calculation where a borrower's liquid assets are entered into a calculation to bring up the amount of monthly income they have in order to make mortgage payments. Generally the calculation is a borrowers total assets divided by a set number of months, such as 360 for the standard 30 year loan. Qualifying assets tend to be only liquid assets such as cash, investment accounts and retirement accounts. 100% of the assets in cash accounts and non retirement liquid investment accounts typically qualify. For retirement accounts the amount that qualifies is generally about 70% of the asset base and could potentially be close to 100% if the borrower is over 591/2 years old. Check with your lender to see what they are willing to use in their calculation.
For instance a borrower who has $1,000,000 in liquid assets and $500,000 in retirement assets may have qualifying monthly income of $3,750. ($1,000,000 + $350,000=$1,350,000; divided by 360)
This is an underwriting technique and does not require the borrower to actually deplete their asset base to make payments.
Asset depletion is not a gurantee to mortgage approval. It is a technique that only helps satisfy the income portion of the underwriting process. Lenders that use this technique often need a good understanding of the borrowers specific situation before they would even grant using this technique as part of the potential approval process.