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Non- QM Loans: Asset Depletion Program Loans

Let’s say that you want to purchase a home with a mortgage, but you don’t have any regular income. You do, however, have a lot of assets. What should you do? An Asset Depletion Program Loan is an option. Usually (but not always) a non-QM loan product, Asset Depletion Programs are a special method of loan qualification, intended for those who have assets but not income.

What is an Asset Depletion Program Loan?

In an Asset Depletion Program, your assets are used as a substitute for income. The total amount of your assets is tallied up and then divided by a set number of months, depending on the program’s qualifications. This number is then used as a monthly income. It’s assumed that if you are unable to pay back a loan, you will start liquidating your assets to pay back that loan. Thus, assets can be used in place of a regular income.

That doesn’t mean that you need to start liquidating your assets. The loan simply qualifies you based on the cost of your assets; it’s up to you to determine how you want to pay back the loan. 

Note that because Asset Depletion is a specific type of loan qualification, it can be technically used to underwrite different types of loan, based on the bank. Notably, it’s possible for Asset Depletion to be used for VA loans, which are manually underwritten based on the individual.

Why Would You Need an Asset Depletion Program Loan?

There are many people, particularly entrepreneurs, who have numerous assets but no regular income. Consider someone who has inherited a large sum of money. They wouldn’t need to work, so they wouldn’t have a regular income. But they still might not want to liquidate their existing assets to pay for a home; they’d rather have a favorable home loan.

Retirees will commonly use Asset Depletion Program loans, because they may have their money locked away in 401ks and other properties. They may be too young to start withdrawing their retirement income without penalty, but will still have the assets at hand, and will be able to start withdrawing their retirement during the course of the loan.

When you liquidate assets, you need to pay capital gains tax. Liquidating one asset to pay for a property, especially a residential home property, generally isn’t a good idea. It’s better to leverage that existing asset for a home property than it is to immediately liquidate it, and that’s where an Asset Depletion Program loan comes in.

If you don’t have a regular income, you can’t qualify for most QM mortgages. A QM (“Qualifying Mortgage”) loan is a federally qualified loan that requires that you can repay the loan based on income. But you can qualify for a non-QM loan, which is more likely to have a manual underwriting process such as Asset Depletion. These are loans designed for those with non-traditional income and non-traditional lending needs.

An Asset Depletion Loan is not an inherently higher risk than a regularly underwritten loan. It can be lower-risk, as you are assuring the bank that you have the money needed to purchase a property right now rather than banking on income in the future. Consequently, it’s possible to get fairly favorable terms, even if it is a non-traditional mortgage product.

How Do You Get an Asset Depletion Program Loan?

To get an Asset Depletion Loan, you need to have enough assets to compensate for a loss of income. For a mortgage, it’s usually the entirety of the term: 30 years or 360 months. If you have the assets to cover your monthly mortgage payments over that time, you can get a loan based on your assets rather than your income.

Understandably, this is open only to people who have substantial assets. But it’s a useful tool for investors, entrepreneurs, and even first-time homebuyers who have a significant amount of assets in the bank. Because it’s usually a non-QM loan, the interest rates relative to the program may be a little higher than average. But otherwise, these are high net worth loans that are specially underwritten and can be customized to the home buyer. 

For an Asset Depletion Program, there’s usually a substantial down payment required. But this does depend on the lender. As with any loan, a larger down payment increases the chances of the loan being approved.

If you’re a high net worth individual who has assets but not income, you can consider an Asset Depletion Program loan for your next mortgage. Whether it’s a personal home or an investment property, an Asset Depletion Program loan makes it possible for you to qualify for a mortgage without having to have a steady income. During this manual underwriting process, you can negotiate your terms, and find a loan that works well for you. 

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