Do you have significant assets in your portfolio, but tax returns don't show much (or any) income that a lender can use to qualify? If so, an asset-based loan might be a solution for you!
A unique niche within the mortgage market is one where lenders look at assets and general liquidity, rather than income as a basis for determining your ability to repay the mortgage.
This type of financing can take many shapes and sizes, all with different terms, pro's and con's.
One such product type is called "Asset Depletion" where a lender calculates a theoretical income number "depleting" or amortizing the assets over a specific period of time - often shorter than the total term of the loan, in order to show that the current assets are sufficient to have regular withdrawals made to support not only the mortgage payment, but also the borrowers cost of living. This product would still use income and calculate debt-to-income ratios. These asset depletion products have varying time periods where the assets are depleted, ranging from 5 years out to 20 years, depending on the product and investor.
Another asset-based loan product would be one niche simply referred to as an "asset qualifier" where, instead of calculating a theoretical income number from assets, the lender simply uses the total amount of assets available to determine qualifying. The most common way this product is executed is verifying the borrower has at least 125% of the loan balance available in the bank after subtracting out down payment and closing costs on the given transaction.
Whether you are a retiree, entrepreneur, investor, business owner or simply a high-net-worth individual, these products can give you a distinct advantage in the mortgage process. Having wealth is very different than showing income, and fortunately there are specific products here to meet this need.
The Millionaire Who "Doesn't Make Enough Money"
I've seen it before - someone comes to me wanting to purchase a $1.5m home and has $3m in assets between investments and retirement, minimal debt, excellent credit but not income that is either clear, or easy to document via traditional standards.
Rather than looking at tax returns, we have helped folks in this situation with their financing simply by acquiring bank statements rather than running them through the typical underwriting marathon of paystubs, w2's tax returns, p/l's, income statements and more.
Asset-Based Doesn't Mean "No Qualification"
Now, just because you've got money in the bank, that doesn't mean your loan will be automatically approved. We lenders will still take several important things into consideration, including:
Credit score
Credit history
Eligible asset types
Down Payment
Occupancy
Seasoning of funds
Assets remaining after closing
So, just to be clear, there is still an underwriting process, but it is more focused on the assets, rather than the income.
Eliminating Document Headaches
When using asset-based loans, one of the big benefits of this product is that you are likely relieved from the circular-flow request of endless income documentation, business tax returns, K-1's, CPA letters, year-to-date P&L's and much more.
Most of the time, we need to get your most recent 2 months of bank statements for all assets being considered, as well as one bank statement from 6-12 months ago (depending on program) to verify the funds have not been recently deposited.
In most cases, this is the bulk of the qualifying assets that we need to obtain, along with any letters of explanation or supporting documentation for large deposits or activity in those accounts that is not self-explanatory.
This Is Where Mortgage Strategy Matters
This is exactly why I don't think mortgage advice should begin and end with, "What's your income?"
For a traditional W-2 borrower, that may tell us quite a bit. For a high-net-worth borrower, it may tell us very little. I want to understand:
What do you own?
How are your assets structured?
How much liquidity do you want to maintain?
What income are you already receiving?
What are your tax and investment considerations?
How much are you comfortable putting down?
How long do you expect to own the property?
What are you actually trying to accomplish?
That's a very different conversation than simply plugging numbers into a mortgage calculator.
Key Takeaway
Having substantial wealth but limited taxable income doesn't automatically prevent you from qualifying for a mortgage.
Asset-based mortgage programs can approach qualification in several ways. An asset-depletion mortgage may calculate theoretical monthly income from your eligible assets and use that income to help you qualify.
An asset-qualifier mortgage may instead focus on the amount of eligible liquid assets you have remaining after closing. With certain programs, having qualifying assets equal to 125% of the mortgage amount may satisfy the asset-qualification requirement without relying on traditional employment income.
Your income is one part of your financial picture. Your balance sheet may tell an entirely different story. And with the right mortgage strategy, sometimes that's the story we need to tell.
-Brian Kimball, Sr. Mortgage Advisor/Team Leader, The Lighthouse Group at Waterstone Mortgage