Asset Depletion

Asset Depletion

DTI too high?  Use Asset Depletion Qualification

Many borrowers have assets but their income is not sufficient to qualify for a loan.  Maybe the borrower is self-employed and their tax returns do not indicate enough income to qualify.  Or maybe the borrower is retired and no longer has enough income.  Asset Depletion Qualification is a way for an underwriter to use a borrower’s assets to provide more income to qualify.

After all, the borrower’s assets are in an income bearing vehicle, like interest checking, savings or money market accounts, or stocks, bonds and mutual funds…the assets are working for the borrower and generating income.  We can use those assets to help your borrower qualify.  Although this makes perfect sense, it is highly irregular for an underwriter to approve a borrower using assets as income. But our underwriters understand the logic in approving a borrower who has demonstrated their ability to save and accumulate assets.  Asset Depletion Qualification is simply an Underwriter’s tool to apply more qualifying income by calculating a return on the borrower’s “liquidable” assets.

Examples of Asset Depletion:

Example 1:  43-year old borrower:

•    Borrower’s income is $5,000/month but DTI is too high to qualify.

•    Borrower has $1,000,000 in liquid assets.

•    The underwriter uses Asset Depletion to help with the DTI by running a mortgage calculation at 5% over a 30 year amortization on the borrower’s $1,000,000 assets.  Why a 30-year amortization?  Because the borrower’s age (43) subtracted from 85 is more than 30 years.

•    Calculation:   $1,000,000 at 5% over a 30-year amortization: Result:  $5,368/month additional income for qualifying purposes. This amount is added to his existing $5,000 income so now he has $10,365/month for qualifying purposes.

Example 2:  73-year old borrower:

•    Borrower’s income is $5,000/month but DTI is too high to qualify.

•    Borrower has $1,000,000 in liquid assets, including a retirement account.

•    The underwriter uses Asset Depletion to help with the DTI by running a mortgage calculation at 5% over a 12 year amortization on the borrower’s $1,000,000 assets.  Why a 12-year amortization?  Because the borrower’s age (73) subtracted from 85 equals 12 years. This gives a more favorable calculation for the borrower.

•    Calculation:   $1,000,000 at 5% over a 12-year amortization: Result:  $9,250/month additional income for qualifying purposes. This amount is added to her existing $5,000 income so now she has $14,250/month for qualifying purposes.

Calculations for qualification on Asset Depletion (ask Derek for updated underwriting terms)

•    Determine the Present Value of the Assets:  the total amount of eligible assets, less down payment, less required reserves of 12-months total debt service (PITI on the subject property plus all other payments including auto, credit cards, and other mortgage payments).

•    Eligible assets must be cash or cash equivalent, trust funds, investment portfolios (stocks, bonds, mutual funds), and retirement accounts only if the borrower is of retirement age (62).

•    Ineligible assets include equity in REO, private stock, and retirement accounts if the borrower is not of retirement age (62).  If you’re unsure about a particular asset, call or email Derek!

•    No double-dipping…if your borrower is already receiving income from the assets which is reflected on the 1003, then you may not use Asset Depletion on those same assets…it would considered double-dipping.

•    Rate:  always use 5% – we could use a higher rate if it was necessary and with evidence that a higher rate is warranted.

•    Amortization:  subtract the borrower’s age from 85 and use that as the amortization period but no more than 30 years and no less than 10 years.  For example, if the borrower is 61 years old, then the amortization period is 24 years (85-61). If there is more than one borrower, then use the borrower whose name appears on the asset account.  If both borrowers’ names are on the asset account, then use the lower age.

•    Resolve for Payment and include on the 1003:  the resulting number is then added to the existing income for DTI purposes – on the 1003 under Other Income.

Notes:

•    The target DTI is 40%.

•    Asset Depletion can be used on any scenario, at any LTV, and with any product…there is a pricing adjustment applied to the lock.