There is a new kid in town when it comes to mortgage loans. One that allows retirees and others to use the power of your assets rather than your income to qualify for a mortgage loan. Investopedia describes asset-based lending as the loaning of money based on a borrower’s assets. It goes on to say that most asset-based lenders have a strong preference for liquid assets rather than physical assets that must be handled, stored, appraised, sold, etc. They prefer stocks, bonds, mutual funds, and similar assets.
While often used in business to create cash flow for the organization, in the world of mortgages, asset depletion programs have other advantages to offer.
The asset depletion loan program is one you may not have heard much about until now, but it can make a huge difference for your options when it comes to obtaining a mortgage. This is especially the case if you are asset-heavy and income light. This program is particularly beneficial for some of the following individuals:
- Business owners who show low levels of income.
- Larger businesses that need to maintain adequate cash flow and would prefer to utilize assets.
- Wealthy individuals who show little income – or insufficient to purchase the homes they’re in the market for.
- Retirees who show little income but have a lot in various retirement accounts.
- Self-employed borrowers.
- Entrepreneurs and real estate investors.
Even so, this is a type of loan program that isn’t widely used among lenders. The first challenge, for many, is finding a lender that is willing to work with you through this program to help you get the home you desire.
Assets permitted for this type of loan program include retirement accounts – up to 60 percent of their value, 100 percent of liquid assets, and 100 percent of your personal bank accounts, cash, and money market accounts. It only allows for 70 percent of the value of your stocks and bonds.
What Is the Asset Depletion Program?
Asset depletion loans are loans that use your assets as collateral instead of your income. It allows people to deplete their assets to count that money as income for the duration of the loan. There are a few facts and figures borrowers need to understand before diving into an asset depletion program loan.
- 70 percent. This is what lenders take of the total amount of your qualifying or eligible assets.
- Closing costs and other loan expenses. These are subtracted from the top of the total.
- 360. The balance is divided by 360 (regardless of loan terms) to be split into monthly installments that are then added to your monthly income to help you meet income qualifications for the loan.
- 30 percent. This is the recommended down payment for an asset depletion program loan. While this is the recommended down payment, you should note that some lenders require smaller down payments. It is still possible and highly recommended, to shop around for the best terms – even with the asset depletion program.
Through the Freddie Mac program, Social Security benefits and income from things like interest and dividends are also allowed. As always, you can use assets to supplement a lower income or to replace the income completely. If you are using depleted assets alone to fund your loan, then you do not need tax returns, proof of income, etc. However, these things are required for people who are using assets to supplement income to qualify. Each lender will have its own requirements and standards for qualifying for asset depletion program loans.
Benefits of Asset Depletion Program Loans
There are plenty of benefits that make asset depletion program loans a real win among consumers. One of the biggest benefits is that you do not need to jump through hoops to prove your income to secure this type of loan. With this particular type of loan, it isn’t about how much you earn, but how much you own, in verifiable assets that makes the difference.
Do not mistake this type of loan with a reverse mortgage. The two are different in many ways. One way is that you can use asset depletion program loans for second homes that aren’t intended to be primary residences.
- For businesses, asset-based loans help them to free up cash flow, so they have sufficient working capital for the business.
- Real estate investors enjoy many potential benefits from asset-based lending including paying considerably lower interest rates than are required with other types of hard money loans.
- Lower interest rates than hard money loans so many turn to when they are asset-heavy and income light.
- Can be used on investment properties, multi-family homes, and for refinance mortgages, as well.
- Loan sizes as low as $100,000 up to $3-5 million depending on the lender and the strength of your assets.
- Lower credit requirements than many standard loans. Some lenders offer asset depletion loans with credit scores above 500 though most require credit scores of 600 or better.
- Offers borrowers with older loans carrying higher interest rates to refinance at lower interest rates, saving tons of money. The real beauty is that you don’t have to prove income for this loan program. That means, even if you’re retired, you still stand the opportunity to reduce your interest rates.
These are just some of the benefits borrowers discover when dealing with asset depletion loans. Benefits that many borrowers find highly satisfying for meeting their needs.
Potential Considerations for Asset-Based Loans
The biggest risk of this type of loan program is that if you default on your mortgage, you’re also forfeiting your assets. Since your assets are pledged and depleted for the loan, this can have devastating long-term consequences.
The other major consideration is that you may be required to deplete important retirement assets to meet the qualifications for the loan. For some people, this can be truly detrimental, to the point of crippling retirement plans, forcing them to return to work, or eliminating any security they thought they may have for their retirements.
Some lenders skip debt-to-income requirements for these types of loans. This can make all the difference in the world for some borrowers when it comes to securing a mortgage loan.
Assets being counted must be fully vested so that penalty-free withdrawals are possible. For some people this can present a bit of a hardship.
Also, many lenders do not advertise the fact that they offer asset depletion mortgage loans. You may have to ask around before finding lenders that do.
Finally, many borrowers consider the 30 percent down payment requirements of many lenders to be challenging, forcing them to think carefully about whether or not this is the best loan option for their needs.
Choosing the Right Lender for Your Asset Depletion Program Loan
Because terms vary widely from one lender to the next, it is also extremely important to explore your options and compare them before choosing the lender you wish to work with. Some will offer much more favorable terms than others and it is in your best interests to find the one that offers terms that are most favorable to you and your needs.
You might find differing terms or requirements for the following, which can greatly impact how much you will ultimately pay for your loan. Things you want to compare between lenders include:
- Loan minimum and maximum values.
- Minimum credit score requirements.
- Debt-to-Income ratio requirements, if any.
- Down payment requirements rates vary widely with some lenders requiring only 10 percent down and others requiring 25-30 percent for down payments.
- If cash-out refinance options are allowed. If your goal is to refinance your existing home while capitalizing on your equity and reducing your interest rates, you want to make sure your efforts will pay off on all fronts. Your assets can help with that when you secure an asset depletion program loan.
One more thing to consider when comparing lenders for asset depletion program loans is how clear the requirements are, how well you understand the terms, and how easy the application process appears to be.
Clarify and ease in the application process may indicate an organization that is on the level and above board in all their business practices.
What Types of Accounts Can Be Used as Assets?
You will find that many different types of accounts qualify as assets for the sake of an asset depletion program loan. This includes:
- Checking and savings accounts.
- Certificates of Deposits.
- Stocks, bonds, mutual funds, and other investment accounts.
- Money market accounts.
- Retirement accounts, such as IRAs and 401(k)s.
Depending on your situation and circumstances, you may only need one of these accounts to fund your purchase. In most cases, though, since homes are such large purchases, you will require assets from multiple accounts. The key when determining which assets to use to for your loan is to seek out those that are easily converted into cash.
You must also ensure that these assets aren’t securing other debts with other lenders.
Getting More Mileage from Your Asset Depletion Program Loan
Many people struggle with the concept of an asset depletion mortgage loan. It goes against your natural way of viewing borrowing. The absolute best way to go about it is to apply for the loan while you still have, at least, some income helping out the household budget month after month. That allows you to maintain and safeguard some of your retirement security and personal assets while providing you with the funds you need to make your investment now.
Of course, that’s not the only reason to consider doing this while you have an income. It could impact your interest rates if you’re only using some of your assets and still relying on your good credit history, financial history, etc. It also may be the perfect tool to push your income over the edge without facing some of the risks associated with these types of loans. Minimizing your risks, in every way possible, is the biggest favor you can do yourself when putting your retirement security on the line to secure or refinance a first or second home.
When it comes to borrowing and investing with lower than average income, there are no perfect choices. For many investors who are asset-heavy and income poor, though, this can present an outstanding solution that allows you to have your home – and live in it too.
We invite you to explore all your financing options to find the one mortgage loan program that works best for you. Regardless of your need, there is sure to be one that fits perfectly. As always, don’t hesitate to ask questions, seek clarification, and get answers when you have concerns about a loan program or process that gives you pause.