One of the most important components of your mortgage application is the establishment of your income. Basically, the bank, lender, or lending agent needs to know how much money you make or how much money you have, as this will directly impact on your ability to repay the loan.
But what if your income and savings are tied up in retirement accounts, such as 401(K), mutual funds, and other investment accounts?
In this case, your lending agent can use a process called “asset depletion.”
This is somewhat confusing, yet surprisingly simple way to establish your income, and it may be the best strategy for securing your loan.
Asset Depletion: A Surprisingly Simple Way to Establish Your Income
What is Asset Depletion: A Closer Look
Asset depletion is a technique that uses savings, investments, and other assets to establish an income for a potential borrower. Essentially, all of your assets are entered into a calculation and a final number is churned out. The final number is then used as your income or is added to your already existing income.
We could attempt to explain it from every possible direction, but it’s best to simply explain the process, which should give you a better understanding of its use and effectiveness.
How is Income Calculated with Asset Depletion?
The process for asset depletion is quite simple. The lending agent will simply add up all of your assets, subtract a certain percentage (usually 30%), and divide the number by however many months will be on the loan.
Sounds complicated? It’s really not.
The first part is easy. All you, as the borrower, need to do is bring information on your assets, including all savings, properties, and retirement accounts. The lender may not be able to use everything, but overall this will establish the foundation for calculating your income based on assets.
The next step is reducing the number by a certain percentage. While the chances of your assets declining in value are slim (most likely they will grow, especially if they are in a well-managed and diversified portfolio), a lender will make this reduction to basically account for the financial risk of stocks and bonds. They could go down in value, so they are reduced to reflect this possibility. Usually the reduction is 30% for anyone over 59.5 years of age. If you are under 59.5 years old, the assets will be reduced by 40%, which reflects the possibility of early-withdrawal fees.
Finally, the lender will divide that number by the amount of months in the potential loan. If you are applying for a 30-year loan, the number will be divided by 360. (There are 360 monthly payments is a 30-year loan.) If it’s a 15-year loan, it will be divided by 180.
After the division is calculated, you have a number that can be used as (or added to) you income.
Lets look at how this plays out in a few different examples…
Example 1:
- $500,000 in Assets
- 60 years-old borrower
- Application for a 15-Year Mortgage
- Asset Depletion Income: $1,944.45
In this example, the borrower’s total assets are equal to $500,000. Because the borrower is 60 years old, their assets will only be reduced by 30%. This brings the $500,000 down to $350,000, which is then divided by 180, as there are 180 monthly payments in a 15-year mortgage. This leaves us with a final number of $1,944.45. This final number can then be used as part of the borrower’s mortgage application.
Example 2:
- $1,000,000 in Assets
- 45 years-old borrower
- Application for a 30-Year Mortgage
- Asset Depletion Income: $1,666.67
For this next example, we are looking at a 45-year old borrower who has $1 million in total assets. Because the individual is younger than 59.5 years of age, their assets will be reduced by 40% instead of 30%. This leaves us with $600,000, which is then divided by 360 because it’s a 30-year mortgage (360 payments). The final number, in this case, is $1,666.67
Example 3:
- $2,000,000 in Assets
- 70 years-old borrower
- Application for a 15-Year Mortgage
- Asset Depletion Income: $7,777.78
In this case, the borrower has $2 million in assets, which is reduced by 30%, leaving a total of $1.4 million. This can then be divided by only 180 (15-year mortgage = 180 payments) giving us a final number of $7,777.78.
These are just a few examples, but they demonstrate how your assets can be used, and it may give you an idea of just how much could be added to your application if you use asset depletion.
When Should You Use Asset Depletion?
So who should actually use asset depletion? Obviously it’s not needed for everyone, but there are people in specific situations who will benefit most from this process. First, to use this option effectively you should have a significant amount in assets, especially non-liquid assets such as retirement accounts and investments. If you only have a few thousand dollars in assets (or at least assets that can be used for this process), it won’t be worth the effort, as it will only add a few dollars to your mortgage application.
Generally people who are older will also benefit the most. If you are over 59.5 years of age, you assets will be depleted less when calculating the figures, leaving you with more income to use. Basically, if you are 60 or older, you will have more borrowing potential.
Finally, people who are low on employment income will benefit. Usually your income from employment will be used, but if your employment is low (maybe you’re retired and only work part time or not at all), you will benefit from this process.
So while anyone can use asset depletion, if you are high in assets, over the age of 59.5, and low in employment income, you will get the most from this process.
Get Outstanding Service for Using Asset Depletion as Income
Want more information on asset depletion as income? Contact our staff today to learn more about this useful option!
