What Is an Asset Depletion Mortgage?

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DEFINITION

Lenders offering asset depletion mortgages base approval on a borrower’s assets rather than their employment income. The assets serve as collateral for the mortgage and can be seized if a borrower can’t make their payments.

Definition and Example of an Asset Depletion Mortgage

An asset depletion mortgage is a mortgage that bases a borrower’s eligibility on the value of their eligible assets instead of their employment income. Lenders add up the value of all of a borrower’s qualifying assets and divide it by a number of months, commonly 240 or 360, to get a hypothetical cash annuity stream.

That amount is added as a borrower’s “other income” on their loan application and is considered when a lender determines how much mortgage the borrower can afford.

  • Alternate name: asset-based mortgage, asset dissipation mortgage, asset depletion underwriting, asset amortization underwriting
  • Acronym: ADU

For example, say you are self-employed and don’t have enough verifiable income to get a qualified mortgage, but you do have $1 million in eligible net assets. You can use your $1 million in assets to get an asset depletion mortgage. With this mortgage, the lender divides $1 million by 240 and determines you have $4,166 in qualifying “other income.” It then calculates your maximum loan amount based on its criteria and sends you a preapproval letter.

An asset depletion mortgage can be a helpful mortgage option if you don’t have traditional income, but do have plenty of assets.

Lenders will subtract the following from your qualifying assets: borrowed money, gifts, assets used for your home purchase, and assets used as collateral on another loan.

How Asset Depletion Mortgages Work

When lenders evaluate whether you can afford a mortgage or not, they typically look at your employment income. However, in some cases, people can afford a mortgage without being employed or if they are self-employed with no verifiable income.

For example, you may be retired with no fixed income or a high-net-worth individual with significant assets but no income. In these cases, asset depletion mortgages let you use your assets to prove you can pay for a mortgage.

To qualify, you’ll first need to find a lender that offers this type of loan. From there, you’ll apply and provide the details of your assets, including the types of accounts you have and how much they’re worth. Not all assets will qualify. Eligible assets usually must be liquid and typically include:

  • Checking accounts
  • Savings accounts
  • Retirement accounts (IRAs/401(k)s with current distributions)
  • Certificates of Deposit (CDs)
  • Money market accounts
  • Investment accounts (stocks, bonds, and mutual funds)

However, lenders may only use a percentage of an asset's total value when calculating how much you can afford. For example, North American Savings Bank uses 70% of the value of a borrower’s stocks, stock options, and mutual funds accounts. So if you had $500,000 in mutual funds, the lender would only count $350,000 toward your income. The lender then will divide your eligible assets by a determined number of months—typically between 240 and 360—to get your estimated monthly income.

When a lender determines how much monthly income you can get from your assets, that amount is used to determine the maximum house payment you can afford. It is not the house payment the lender will allow.

Let’s look at an example. Say you are self-employed but you have many expenses and write-offs that bring your net annual income down to just $10,000. However, you have $2.3 million in your investment accounts. If your lender counts 70% of investment account assets toward an asset depletion mortgage, a total of $1,610,000 would qualify.

The lender would then divide the $1,610,000 by 240 months, giving you a monthly income amount of $6,708. That amount would be used to determine the loan amount you could borrow. However, it’s not the only factor. Lenders also typically consider a borrower’s credit score, desired loan amount, down payment amount, and debt-to-income ratio.

Do I Need an Asset Depletion Mortgage?

If you are having trouble qualifying for a mortgage because you don’t have enough qualifying employment income, you may want to consider an asset depletion mortgage. However, to qualify, you will need to have a significant amount of qualifying assets.

Consider that most lenders will divide your qualifying asset value by 240 or more. So if you wanted to have at least $2,000 in monthly other income, you would need at least $480,000 in qualifying assets.

Pros and Cons of Asset Depletion Mortgages

Pros
  • Qualify for a mortgage without income, using liquid assets

  • Use for various home types

  • A variety of asset account types qualify

Cons
  • Higher down payments are required

  • Can require higher credit scores

  • Must be retired to fully use retirement accounts

Pros Explained

  • Qualify for a mortgage without income, using liquid assets: This is a helpful mortgage option for borrowers without traditional employment income who have a significant amount of liquid assets.
  • Use for various home types: Lenders often allow you to use these mortgages for primary homes, secondary, homes, investment properties, and more.
  • A variety of asset account types qualify: Many types of assets can be considered, including depository accounts, retirement accounts, and investment accounts.

Cons Explained

  • Higher down payments are required: The required down payment on these mortgages is often much higher than qualified mortgages, ranging from 20% to 40%.
  • Strong credit scores are required: These loans can be riskier for lenders, which results in higher minimum credit score requirements.
  • Must be retired to fully use retirement accounts: If you want to use funds in a retirement account, you typically need to wait until retirement, when you can withdraw the funds in their entirety. Some lenders will include a portion of your retirement accounts if you are under age 59½.

Key Takeaways

  • Asset depletion mortgages use assets instead of employment income to qualify you for a mortgage.
  • Your assets must typically be liquid to qualify, such as your checking, savings, CD, money market, or investment accounts.
  • Approval often requires significant assets, good credit, and larger down payments.

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Article Sources

  1. Freddie Mac. “Guide Section 5307.1.”

  2. Office of the Comptroller of the Currency. “Mortgage Lending: Lending Standards for Asset Dissipation Underwriting.”

  3. North American Savings Bank. "Asset Depletion Loan."