What is asset depletion?
Asset depletion is a qualification method that uses eligible assets to support an estimated monthly income amount under the specific program's rules. It can be useful for retirees, high-net-worth borrowers, business owners and borrowers whose assets are stronger than their taxable income.
There is not one universal formula
Different traditional and alternative programs can use different eligible asset types, percentages, calculation periods, age rules, property requirements and loan-to-value limits. One lender's formula should not be treated as universal.
Simple example
Assume a borrower has $1,350,000 in potentially relevant investment and retirement assets. After removing transaction funds, required reserves and any program-specific adjustments, assume $1,080,000 remains eligible. If a particular method divided that amount by 360 months, the illustrative income would be $3,000 per month.
This is only an example of the concept. Another program can calculate the same asset portfolio differently.
Why all assets are not automatically counted
The lender may need to determine which assets are liquid, accessible, owned by the borrower and available after the down payment, closing costs and required reserves. Certain investment assets may also be discounted because market values can fluctuate.
Potentially relevant assets
- Retirement accounts
- Brokerage and investment accounts
- Stocks, bonds and mutual funds
- Other program-approved liquid assets
Asset depletion vs. regular investment income
Dividends, interest, capital gains or retirement distributions may qualify under traditional income rules when requirements are met. Asset depletion is different: it converts eligible underlying assets into a calculated income stream.
Asset depletion vs. bank statement
Bank-statement programs focus on business or personal deposits. Asset depletion focuses on the borrower's assets. A self-employed borrower with both strong deposits and significant investments may have more than one route worth comparing.
Asset depletion vs. DSCR
Asset depletion focuses on the borrower. DSCR focuses on investment-property cash flow. For a rental property, DSCR may be the cleaner route; for a primary or second home with large assets and limited income, asset depletion may be more relevant.
What documents may be needed?
- Retirement account statements
- Brokerage or investment statements
- Bank statements when relevant
- Proof of ownership and access
- Documentation of funds used for closing
- Reserve documentation
- Other program-specific asset documentation