Non-Traditional / Non-QM Programs: Asset-Based Income
Asset-based income for mortgage financing refers to the method of using an individual’s liquid or semi-liquid financial assets as a source of qualifying income when applying for a mortgage. This approach is commonly used by borrowers who may not have sufficient regular income but possess significant financial assets. Here’s a detailed breakdown:
1. What is Asset-Based Income?
Asset-based income involves calculating a stream of income derived from an individual’s qualifying assets. These assets are typically used to demonstrate the borrower’s ability to repay the loan.
2. Types of Qualifying Assets
Not all assets can be used to qualify for a mortgage. The following are commonly accepted:
- Cash and Cash Equivalents: Savings accounts, checking accounts, money market accounts, and CDs.
- Investments: Stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
- Retirement Accounts: IRAs, 401(k)s, and pensions (age and withdrawal rules apply).
- Trust Funds: Irrevocable trust distributions.
- Other Liquid Assets: Proceeds from the sale of a home or inheritance.
3. How Lenders Calculate Asset-Based Income
Lenders determine how much income can be attributed to the borrower’s assets. Here’s a typical process:
- Determine Eligible Asset Amount: Only a portion of total assets may be considered, depending on the asset type and lender guidelines (e.g., 60%-70% of stock portfolios after potential tax deductions).
- Subtract Loan Closing Costs and Reserves: Any funds needed for the down payment, closing costs, and required reserves are deducted.
- Divide Remaining Assets Over a Term: The leftover amount is divided by a specific term, usually the loan term (e.g., 360 months for a 30-year loan).
4. Asset-Based Income for Retirees
Retirees often use asset-based income because they may lack traditional employment income but hold substantial retirement or investment accounts.
- Retirement Account Access Rules: For accounts like IRAs or 401(k)s, borrowers must demonstrate the ability to withdraw funds without penalties (usually after age 59½).
5. Asset Depletion vs. Drawdown
- Asset Depletion: Assumes no actual withdrawal of funds, just theoretical income for qualification purposes.
- Asset Drawdown: Borrowers actively draw from their assets to supplement cash flow.
6. Key Considerations
- Tax Implications: Tax rates or penalties may reduce the value of certain assets, like stocks or retirement accounts.
- Reserve Requirements: Lenders may require reserves beyond the down payment, which can impact the calculation.
- Lender Guidelines: Different lenders have varying criteria for acceptable assets and income calculations.
7. Pros and Cons of Asset-Based Income
Pros:
- Allows high-net-worth borrowers to qualify without employment income.
- Useful for retirees or self-employed individuals with significant assets.
- Flexible in terms of asset types.
Cons:
- Asset values may fluctuate (e.g., stock market investments).
- Lenders may apply conservative calculations, reducing qualifying income.
- Limited to specific lenders or programs.
8. Suitable Borrowers
- Retirees
- High-net-worth individuals
- Self-employed individuals with irregular income
- Investors with substantial liquid assets
If you’re looking to explore asset-based income for a specific mortgage scenario or lender program, let us know, and we can provide tailored advice or calculations!
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