An asset depletion mortgage, also known as an asset dissipation mortgage, is a type of home loan designed for individuals with substantial liquid assets but irregular or insufficient traditional income sources. This type of mortgage allows borrowers to qualify based on their assets rather than their income. Lenders calculate an imputed income based on the value of the borrower's liquid assets, which can include savings accounts, retirement accounts, investments, and other financial assets.
How an Asset Depletion Mortgage Works
- Calculate Total Liquid Assets: The lender sums up the borrower's liquid assets.
- Determine Depletion Period: The lender determines a depletion period, commonly 30 years, which matches the term of a traditional mortgage.
- Impute Monthly Income: The total liquid assets are divided by the number of months in the depletion period (e.g., 360 months for a 30-year mortgage) to calculate the imputed monthly income.
Example of an Asset Depletion Mortgage
Let's say Alice has $3,600,000 in liquid assets but does not have a consistent monthly income from employment or business. She wants to obtain a mortgage to buy a home valued at $600,000.
- Calculate Total Liquid Assets: Alice has $3,600,000 in liquid assets.
- Depletion Period: The lender uses a 30-year period (360 months).
- Impute Monthly Income:
- Imputed Monthly Income = Total Liquid Assets / Depletion Period
- Imputed Monthly Income = $3,600,000 / 360 months
- Imputed Monthly Income = $10,000
With an imputed monthly income of $10,000, Alice can qualify for a mortgage even if she doesn't have a traditional income stream. The lender will use this figure to assess her ability to make monthly mortgage payments.
Advantages and Considerations
Advantages:
- Access for Wealthy Retirees: Ideal for retirees who have substantial savings but no employment income.
- Flexibility: Useful for individuals with substantial investment portfolios or business owners who reinvest earnings rather than drawing a regular salary.
Considerations:
- Higher Interest Rates: These mortgages may come with higher interest rates due to the unconventional income qualification.
- Liquidity Requirements: Borrowers need to maintain significant liquid assets throughout the mortgage term.
- Lender Specifics: Different lenders may have varying requirements and methods for calculating imputed income.
Overall, asset depletion mortgages provide a pathway for individuals with substantial assets but irregular income to secure home financing.
