Chicago asset-depletion mortgages (also known as asset dissipation mortgages) come in two broad groups:
Like all other conforming mortgages, asset depletion loans are said to be conforming when they follow Fannie Mae or Freddie Mac’s rules.
They are non-conforming when they do not follow those rules.
Asset-depletion can be combined with wages or income from self-employment. Part of a borrower’s income can come from depleting an assets and part from wages. Or one borrower’s income comes from depleting an asset while a co-borrower’s income comes from wages or self-employment.
Most Chicago lenders do not want you to convert your non-cash assets into cash. But they also do not consider the face value to be your income. Below is how most lenders look at your assets:
- cash in bank accounts – 100% is considered income (if other rules apply… see below).
- stocks, and such – 80% of face value is considered income
- retirement funds – 70% of face value is considered income.
Conforming Chicago Asset-Depletion Mortgages
You can use this type of asset-based loan to purchase and refinance (non-cash-out) a primary or secondary one-to- four-unit home. The loan-to-value depends on the age of the borrower:
70% if under 62 years old at the time of the closing; 80% if 62 or older. If the assets are owned by more than one person, all owners must be on the loan. In addition, the age of the youngest owner determines the LTV.
Calculating Income for Conforming Asset-Depletion Loans
- subtract all the closing costs and the down payment from the assets;
- subtract required reserves (if any);
- subtract penalties and transaction costs (for using retirement accounts);
- divide the result by the amortization term (in months). If you’re taking out a 5/1 ARM, you divide by 60, if a 30-year loan, you divide by 360.
All assets used for a this type of mortgage must be owned personally by the borrower or co-borrower(s) and must come from one of two source:
- lump-sum retirement or severance package or
- retirement account(s).
If you’re self-employed and give yourself a lump-sum retirement or severance package, it doesn’t count.
If the assets are in the form of retirement accounts, you must have unrestricted access to the funds and the distribution is not enough to qualify by itself or has not been set.
All the other requirements Fannie Mae or Freddie Mac have apply.
Non-Conforming Asset-Depletion Loans
There is no standardized non-conforming asset-depletion mortgage program; lenders create their programs based on their particular ideas of what is a good program.
That said, they tend to have overlapping. In general, the LTV requirements are 80% or lower. Some lenders do not allow 80% no matter what (they want 75% or 70%) while others allow it only if your middle score is high enough. High enough means, usually, over 760.
Each lender determines its own maximum loan amount (some only go to $1,000,000 while others go as high as $4,000,000.
Note: These loans require escrows for property taxes and property insurance. Some lenders will waive the escrows if you accept a higher interest rate (usually 0.125% higher).
Assets That Can Be Used
Unlike confirming asset-depletion loans, the non-conforming loans accept assets that cannot be tied directly to employment. For instance, money earned from selling a condo or even money that’s been sitting you your bank account for a long period.
Non-Conforming Asset Depletion Income Calculations
To figure out the qualifying income, divide net assets by the number of months the loan is amortized over. So, a 5/1 ARM loan would use 60 months while a 7/1 ARM would use 84 months.
Loan Payment Amount / Income Ratios
Generally, lenders want those ratios to be less than 50%; however, if your assets are large enough that you could buy the property without getting a loan, there are lenders that do not care about these ratios.
Some want you to have net assets equal to 125% of the loan amount; some want 150%.
Asset-Depletion Loan Terms
Some of the lenders only do 5/1 and 7/1 ARM loans asset-depletion loans; some also do 10/1 ARMs and 30-year fixed. A few lenders have 40-year fixed loans and even 40-year with the first 10 year requiring only interest be paid.
There are many types of asset-depletion mortgage programs. They are different enough that people in widely different situations can find one that would benefit them.
If you’re in the market for an asset depletion loan for a property in the Chicago area (well, the entire state of Illinois), contact me.