For many first-time homebuyers in California, the mortgage qualification and approval process is one big…
Did you know it’s possible to use your assets as income when qualifying for a mortgage loan in California? It’s true. Borrowers with documented, sufficient assets can often qualify for a home loan in California without the steady income that’s usually required for a “regular” loan.
This unique financing method can be an ideal mortgage solution for certain types of borrowers. This might include retirees, certain self-employed individuals, or anyone else with significant assets but minimal (or no) income to document.
Using Your Assets to Get a Mortgage Loan in California
With a traditional mortgage loan, borrowers typically have to show that they have enough regular income to cover the monthly mortgage payments. They must also be able to cover all of their other recurring debts, like auto loans and credit cards.
For many borrowers, this is the most direct path to mortgage financing. The borrower uses the W-2 form and other financial records to “document” their income, and to show that it’s enough to cover the monthly payments.
Do you currently have significant assets but lack a steady paycheck or other form of income? If so, you might qualify for a type of home loan known as the “asset depletion mortgage.” This financing strategy allows certain borrowers to use their financial assets, in lieu of the more traditional income, to qualify for a mortgage loan.
This financing method often works well for borrowers who:
- Are gainfully self-employed but show minimal income “on paper”
- Are retired (or nearly retired) and therefore lack a steady income
- Have a relatively low level of income, or none at all
- Are unable to document / verify their employment situation
Basically, anyone who has significant assets but lacks a steady income might be a good candidate for an asset depletion mortgage loan in California. Many home buyers and homeowners in the Golden State have relied on this strategy.
This mortgage financing option goes by different names. You might see it referred to as asset depletion or reduction, or an asset-based loan. These terms are generally interchangeable and refer to same thing.
How an ‘Asset Depletion’ Mortgage Works
You might wonder why it’s called an “asset depletion mortgage.” The reason has to do with the application, underwriting and approval process. With this financing method, the borrower agrees to use his/her financial assets to pay off the mortgage loan over time.
You are essentially “depleting” (or gradually reducing) the assets you already have, in order to repay the mortgage debt.
Here are some of the more commonly used assets:
- Checking or savings accounts
- Certificates of Deposit (CD)
- Money market accounts
- Retirement accounts like the 401k or IRA
- Investment accounts, including stocks, bonds and mutual funds
Just note that certain types of retirement accounts cannot be used as income, or might count for less. For instance, a retirement account with penalties for early withdrawal might be problematic. Oftentimes, these rules get passed down from “higher authorities” like Freddie Mac and Fannie Mae.
When you take on this type of mortgage loan, you’re declaring that you will use asset depletion as a source of income when repaying the debt. So it’s a way to get around the stricter income requirements that are often associated with the more traditional mortgage products.
How Much Can I Qualify for?
When using assets as income to qualify for a mortgage loan in California, you’ll be limited to a certain amount. The same is true for any type of borrower, including those who use traditional W-2 income to qualify for financing. But it works differently with the asset depletion mortgage, as you might have guessed.
Consider the difference between these scenarios:
- Traditional loan: The mortgage lender will use the borrower’s monthly income to determine how much they can borrow, taking into account all other recurring debts.
- Asset depletion: The lender will use the total amount of assets, and the level of liquidity, to determine how much the person can borrow.
Mortgage lenders typically use a formula to determine how much income could be produced by liquidating / depleting the borrower’s liquid assets. This calculation is done for a certain period of time (such as the loan term), allowing the lender to assess the borrower’s ability to repay.
For instance, the asset balance might be divided by 360 for a 30-year home loan. This kind of calculation helps determine how much of a monthly payment the borrower could manage, from month to month.