The Asset Depletion Method for Borrowers

The asset depletion method allows borrowers with considerable wealth but limited documented income to qualify for mortgage financing. This calculation approach treats asset portfolios as income streams, enabling qualification based on financial resources rather than traditional earnings.

Understanding how this method works helps wealthy borrowers leverage their assets for real estate purchases.

How Asset Depletion Works

This method transforms portfolios into monthly income for mortgage underwriting purposes, offering a viable alternative for borrowers whose wealth exceeds their documented earnings. The approach assumes that significant financial resources can theoretically support mortgage payments over the loan term, even without traditional salary verification. Lenders use this calculation to establish income eligibility while maintaining prudent lending standards.

Basic calculation: Total eligible assets ÷ 360 months (30 years) = Monthly income for qualification

Example: A borrower with $1,200,000 in eligible assets generates $3,333 monthly income for qualification ($1,200,000 ÷ 360 = $3,333).

This approach assumes borrowers could theoretically use their wealth over the loan term to make mortgage payments. Lenders don't require actual depletion - the calculation simply provides an income estimation method.

Eligible Assets and Valuation

Not all assets qualify for depletion calculations, with lenders focusing on holdings that can be readily converted to cash. Financial institutions evaluate asset liquidity, market stability, and conversion costs when determining eligibility and valuation percentages. This prudent approach protects both borrowers and lenders from overestimating income based on volatile or illiquid investments that might not provide reliable financial support during economic uncertainty.

Qualifying assets and valuations:

• Checking and savings accounts (100% value)
• Money market accounts and CDs (100% value)
• Stocks, bonds, and mutual funds (70-80% of market value)
• Investment brokerage accounts (70-80% valuation)
• 401(k) and IRA accounts (60-70% of balance)

Non-qualifying assets:

• Primary residence equity
• Business ownership interests
• Collectibles and artwork
• Illiquid investments or limited partnerships

Valuation percentages account for potential fluctuations and transaction costs, with cash equivalents receiving full credit while investment accounts face discounts.

Program Requirements and Documentation

Programs maintain specific eligibility criteria beyond the basic calculation methodology, reflecting the specialized nature of portfolio-based qualification. These requirements ensure borrowers possess sufficient financial stability and creditworthiness to support mortgage obligations throughout the loan term. Lenders also implement documentation standards that verify asset authenticity and establish seasoning requirements to prevent gaming through last-minute financial transfers.

Essential requirements:

• Minimum credit scores: 620-640 depending on lender
• Significant assets: Typically $500,000+ minimum in eligible holdings
• Down payments: Usually 20-25% required
• Cash reserves: 2-6 months payments post-closing
• Property types: Primary and secondary residences only
• Seasoning: 2-3 months of established balances

Documentation includes recent account statements, verification letters, and asset composition analysis.

Calculation Examples and Scenarios

Real-world applications help borrowers evaluate whether this method suits their financial situations and understand potential outcomes based on different wealth levels.

Retiree Scenario

Borrower profile: Retired couple with $2,000,000 in retirement accounts and investment portfolios.

Calculation: $2,000,000 × 70% valuation = $1,400,000 eligible, resulting in $3,889 monthly income for underwriting.

High Net Worth Professional

Borrower profile: Self-employed consultant with $3,500,000 in investments but irregular income documentation.

Calculation: $3,500,000 × 75% average valuation = $2,625,000 eligible, generating $7,292 monthly income for larger loan amounts.

Advantages and Limitations

This approach provides unique benefits for specific borrower profiles while maintaining certain constraints that reflect its specialized nature and risk considerations. Understanding both the opportunities and restrictions helps borrowers make informed decisions about whether portfolio-based qualification aligns with their financing objectives and long-term financial strategies.

Key advantages:

• No salary verification required
• Faster approval for wealthy borrowers
• Suitable for retirees and self-employed individuals
• Privacy protection for complex financial situations

Program limitations:

• Requires significant wealth for meaningful results
• Higher down payment requirements than conventional loans
• Limited to primary and secondary residences
• May not optimize borrowing capacity for some profiles

Interest rates typically mirror conventional mortgage rates since this represents an alternative qualification method rather than a specialized loan product.

Strategic Applications

This method works best for specific financial situations where traditional income documentation proves challenging or inadequate, offering tailored solutions for borrowers whose wealth exceeds their documented earnings.

Retirement Planning

Retirees with considerable portfolios benefit when Social Security and pension income alone don't support desired mortgage amounts.

Self-Employed Professionals

Business owners and entrepreneurs with significant personal wealth but complex business income structures can bypass traditional verification challenges.

Trust Beneficiaries

Individuals with trust distributions or inherited wealth may struggle with standard income documentation despite significant financial resources.

Comparison with Alternative Methods

This represents one of several specialized approaches available to wealthy borrowers, each serving different financial profiles and investment strategies. Understanding the distinctions helps borrowers select the most appropriate financing method based on their asset composition, income patterns, and approval preferences.

Versus bank statement loans:

• Depletion method: Based on investment holdings
• Bank statements: Based on deposit patterns and business cash flow

Versus asset-based lending:

• Depletion method: Uses conventional loan programs with modified approval criteria
• Asset-based: Specialized loan products with different terms and pricing

Program Availability

Availability varies significantly among lenders, with some offering proprietary calculation methods or enhanced options that may provide more favorable terms for qualified borrowers.

Conventional loan programs through Fannie Mae and Freddie Mac accept this method for primary and secondary residences. Portfolio lenders may offer customized calculations or accept alternative holdings not recognized in agency programs.

Optimizing Your Strategy

Strategic positioning can improve qualification outcomes and borrowing capacity.

Consider consolidating holdings into qualifying account types before application. Portfolio rebalancing toward eligible investments may enhance calculations while maintaining investment objectives.

Timing applications during strong market periods can maximize valuations and qualifying income calculations.

Making This Method Work

The depletion approach provides valuable mortgage qualification options for borrowers with substantial portfolios but non-standard income profiles.

Success requires proper documentation, realistic expectations, and strategic positioning of financial resources to maximize calculated income potential.

Borrowers with significant wealth in Austin's competitive real estate market benefit from LendFriend Mortgage's expertise in these programs, ensuring optimal qualification strategies and competitive financing terms.