With asset depletion mortgages, lender take the totality of cash and easily-converted-into-cash assets a borrower has and convert them into income.
(By the way, some people call asset depletion mortgages asset-based mortgages.)
The best way to show you how it’s calculated, is with examples.
Income Calculations for Asset Depletion Mortgages – Examples
The borrower has $1,800,000 cash sitting in a bank account. (We’re using cash because it is the most straightforward way. There are no early withdrawal penalties to take into account, for instance.)
The borrower is purchasing a $600,000 property and their down payment and all the costs associated with this transaction come to $150,000.
All lenders will deduct the down payment and closing costs from the borrower’s funds, so, in our example, all lenders will base the borrower’s buying ability on $1,800,000 – $150,000, or $1,650,000.
Most lenders, if not all, amortize the loan over 30 years.
Lender A divided the $1,650,000 by 60 (the number of months in 5 years). Because most of the time, they give 5/1 loans.
So, per lender A, the borrower’s monthly income is $27,500. If their acceptable debt-to-income ratio is 50%, and many have that as their acceptable ratio, the borrower’s total debt (housing, credit cards, installment loans), cannot have minimum payments over $13,750.
Lender B, divides $1,650,000 by 36. That do that even if the loan is a 5/1, 7/1, 10/1 or a 30-year loan. Yes, some give 30-year loans.
According to lender B, the borrower has $45,833 monthly income ($1,650,000/36=$45,833.33). They, too, have a maximum DTI of 50%.
Which means that, with them, the borrower’s minimum payments on all debt can be as high as $22,916.50.
Are Asset Depletion Mortgages Better With Lender B?
The $9,000+ difference between the way Lender A and Lender B calculate asset depletion mortgage income means that people can borrow a lot more with Lender B (or have a lot of other debts). Is that better?
Lender B, certainly, allows borrowers to carry more debt. But do they charge more for that? Are interest rates on asset depletion mortgages with type B lender higher?
Not necessarily. One of my lenders divides assets by 36 months yet has the best or second best interest rates.