Asset Depletion Loan: The Secret Key
An asset depletion loan allows you to qualify for a mortgage without relying on income from a job. Instead, lenders rely on your assets to determine if you qualify for a mortgage.
When you apply for an asset depletion loan, your lender will calculate the equivalent of your monthly income by adding up your total liquid assets and dividing this figure by 360 months. The result is counted as your monthly income when you are applying for a mortgage.
Let’s say you have $2 million in liquid assets. Your lender will divide that number by 360 to determine approximately $5,555, which will be considered your monthly income.
Your lender will then use that income figure to determine how large a monthly mortgage payment you can afford. The theory is that you will gradually cash in your liquid assets to make your monthly mortgage payments, even if you don’t earn a traditional income from employment.
Who applies for an asset depletion loan?
An asset depletion loan is a specialized mortgage product that isn’t for everyone. It’s most appropriate for borrowers who are retired and have little to no fixed income but who have plenty of liquid cash assets.
It helps, too, to have a nest egg of savings that you can use for a down payment. Because these loans can be riskier for lenders, they often require larger down payments. It varies, but you might have to provide a down payment equal to 20% or more of the home purchase price.
What assets count?
You can use the following as assets to qualify for an asset depletion loan:
- Savings and checking accounts
- Money market accounts
- CDs
- Stocks, bonds and mutual funds
- Equity in other real estate
- The money in IRAs, 401(k) accounts and other retirement accounts
- Any business ownership you have
Lenders might not count certain retirement accounts if you are too young, and you’ll face penalties for withdrawing funds from these accounts. For instance, if you are 35, your lender might not allow the funds in your 401(k) fund to be counted as an asset.
Lenders typically allow you to use 100% of your liquid assets, including the money in savings, checking and money market accounts. You can usually count up to 80% of the current market value of your stocks, bonds and mutual funds and about the same percentage of the funds in your retirement accounts.
Is this mortgage right for you?
An asset depletion loan could be a useful tool if you are asset-rich but don’t earn much or any monthly income.
But be careful: As this mortgage’s name suggests, you will have to deplete your assets to make your monthly mortgage payments. Make sure you’ll have enough in liquid cash, investments, retirement accounts and other assets to cover your mortgage payments until you are ready to move on from the home you are buying.
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