What happens if you can afford a mortgage, but you don’t have an actual ‘income?’ Maybe you live off your investments or you have an inheritance. Since the Qualified Mortgage Rules require lenders to verify your income, it seems like you can’t get a loan. However, you are in luck, because there is a way. It’s called the Asset Based Loan
How the Asset Based Loan Works
As the name suggests, you qualify for the loan based on your assets. The lender will work the process slightly backwards.
They start with your total assets. Let’s say you have $1,200,000 in a liquid account. The lender then takes 70% of that amount. In this case, it’s $840,000.
From that amount, the lender will subtract any money you need for a down payment and closing costs. Let’s say in this case you need $20,000 for closing costs and the down payment. That leaves you with $820,000.
Finally, the lender divides the remaining amount by 360 payments, if you are applying for a 30-year loan. $820,000/360 = $2,277. This is the amount of gross monthly income lenders can use to qualify you for a loan.
The Type of Assets you Can Use
Not every asset will qualify you for this type of loan. Lenders can decide what they want to accept. In general, however the following accounts qualify:
- Lump sum retirement funds
- 401K accounts as long as you are fully vested and of retirement age
- Stocks, bonds, and other legal investments
- Lump sum payments received as a result of any type of employment (except self-employed)
- Lottery winnings
- Lawsuit winnings
Fannie Mae Rules for Asset Depletion Loans
Fannie Mae provides a majority of the asset depletion loans. Fannie Mae allows a maximum 70% loan-to-value ratio on loans that use assets in the place of income. This means you need a 30% down payment plus the closing costs. This could take a large chunk off the assets you use for qualification purposes.
Because you’re only using assets rather than ongoing income, you’ll need at least a 620 credit score. This is according to Fannie Mae, though. Many lenders may require an even higher score in order to qualify. Many lenders base the requirement on your debt ratio. If you have a higher debt ratio, you’ll need a higher credit score to offset that risk. If you have a lower debt ratio, a lender may be willing to accept a lower credit score.
Using Retirement Funds Before Retirement
If you plan to use 401K funds before you are 59 ½ years old, you’ll need to take into consideration the penalty you’ll pay. Let’s use our above example of 1,200,000 in assets.
Let’s say $900,000 of it is in a 401K and you are only 55 years old. You can use the funds, but you’ll pay an early withdrawal penalty. Before you do the above calculations, you must take 10% off the $900,000. This accounts for the penalty you’ll pay. You’d lose $90,000 right off the bat. This reduces your effective income and therefore the amount you can borrow.
You’ll also owe taxes on the amount you withdraw before age 59 ½. Keep this in mind if you plan to use retirement funds to pay your mortgage.
Using Asset Depletion Just for Qualifying
Some borrowers need to use the asset depletion method just to qualify for a mortgage, but they don’t need to use those funds. This happens commonly with self-employed borrowers. They often don’t show enough income because of the number of tax write-offs they take. Lenders would otherwise turn them down if they didn’t have assets to help them qualify for the loan.
These borrowers don’t need to use the assets to pay their loan. They just need them to qualify on paper. In this case, even if you are under retirement age, you can still use your retirement funds to qualify for the loan. If you don’t actually withdraw the funds, you don’t pay a penalty.
On paper, though, you’ll have to decrease your assets by 10% because you would incur a penalty if you used the funds. This just decreases the amount you qualify to receive. Keep this in mind as you attempt to qualify for a loan.
You can qualify for a mortgage without any income. It requires you to get your assets in order, though. Take inventory of all of your assets and their source. Stocks, bonds, CDs, savings accounts, and retirement funds are the most common. Almost all lenders will only use 70% of any account balance, so keep that in mind as you determine how much you may qualify to receive. Asset depletion loans can be Fannie Mae loans or subprime loans.
Take your time and shop around. Look for the lender with the best rate and also the best terms. You may find a subprime lender that provides better terms than a Fannie Mae lender in some cases. Do your research and find the loan that works best for you.