What is Asset Dissipation? (A/KA Asset Depletion)

Posted by Kim Jones-Zweig on Sunday, October 14th, 2018 at 2:09pm.

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  • What is Asset Dissipation? (A/KA Asset Depletion)

    Using assets for qualifying income to demonstrate an ability to make mortgage payments. Asset depletion mortgages, also known as asset dissipation mortgages, enable borrowers to use liquid assets to qualify for a mortgage.  Asset depletion mortgages are good for borrowers with relatively minimal income or no verifiable employment but significant assets such as funds in a bank, investment or retirement account.  Examples of potentially applicable borrowers include the self-employed, retired (or almost retired) and wealthy.

    Fidelity Bank Mortgage uses a formula to calculate the income that could be generated by depleting a borrower’s liquid assets over a fixed period of time and use that income to determine a borrower’s ability to qualify for a mortgage.  The term “asset depletion” is used because the lender assumes that the borrower could sell, or liquidate, his or her assets over time to pay for the mortgage.

    The income derived from the asset depletion formula is added to other income the borrower may earn such as employee wages or social security to calculate the debt-to-income ratio the lender applies to determine what size mortgage the borrower can afford.  A borrower may have significant assets but if the lender’s asset depletion formula does not yield sufficient income the borrower may not qualify for the desired loan amount.  Borrower debt-to-income ratios for asset depletion mortgage vary but generally range between 40% and 50%.  

    Asset Dissipation/Asset Depletion is considered a Non –QM mortgage, (Non-Qualifying Mortgage), even though Freddie allows it but Fannie does not.

  • General Guidelines for Asset Dissipation/Asset Depletion include:

    Most recent 2 months asset statements must be provided;

    • The asset must be owned solely by the borrower

    • Pledged Asset accounts are not eligible

    • The borrower must have full unrestricted access to the funds

    • Assets cannot be used as a separate source of income, i.e., capital gains, interest and /or dividends

    • Distributions are NOT required to be set up prior to closing

    • Business funds are not allowed for income calculations

    • Assets must be held in a liquid and/or near liquid account

    • Depository accounts and securities allowed to be used

    • Sales of a borrower’s business can be used

    • Max LTV – 80%

    • Second homes allowed

    • Calculation for income: Divide “net documented assets”/ by 180 months=qualifying income, the “net documented assets = 70% of the sum of eligible documented assets minus any funds that will be used for closing costs, reserves or funds to close.

       EXAMPLE:

       Borrower eligible net assets after down payment and closing costs: $1,000,000

    • Monthly income from asset depletion: $1,000,000 (eligible net assets) / 360 months = $2,778 in monthly income

     

Senior Mortgage Banker
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Fidelity Bank Mortgage
304 Tribble Gap Road, Suite 200
Cumming, Georgia 30040
p: 678.468.4046 | f: 678.829.0612
e: kim.jones@lionbank.com
w: www.kimdjones.com

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