Asset Depletion also known as Asset Utilization is a unique method of helping you qualify for a mortgage if your regular monthly income is not high enough.
When you apply for a mortgage, lenders usually require your debt to income ratio to be within a maximum threshold – commonly 45%. But what happens when you are self-employed in a business that allows you to maximize your tax deductions in order to minimize your taxable income?
Often times an underwriter, properly following their own guidelines, will not be able to approve a loan despite large bank balances and a good credit score. This is due to the existing guidelines they must follow from their investors – the businesses that actually provide the lender the funds to loan for mortgages.
Until recently, self-employed borrowers who maximize deductions to minimize taxable income had few options available for obtaining a home loan.
Happily the mortgage market is evolving and now offers a variety of solutions to fit these unique situations.
For Example: A self-employed individual wants to purchase a home for $1,000,000. He / she wants to make a down payment of $100,000 and obtain a mortgage for the $900,000 balance.
A mortgage payment on a $900,000 loan, including property taxes and homeowner insurance, is approximately $6,400 per month.
Their qualifying income based on their tax returns is $102,000 per year ($8,500 per month). They have cash and investment balances of $800,000 after subtracting the down payment, closing costs and required reserves.
Under the traditional qualifying formula, assuming no other debt like car payments and credit cards, the total income needed to qualify for this loan is approximately $14,000 per month, or about $170,000 per year.
However, with a good credit score and common sense-underwriting rules, the $800,000 in liquid assets can be converted (on paper) to approximately $4,300 per month, and is added to the regular monthly income of $8,500 for total qualifying income of approximately $12,800. Then utilizing common-sense approval rules paired with a good credit score and ample reserves, this loan is approved.
If you have a question you’d like me to answer regarding your home loan, please contact me by sending an email message to Linda@LindaOnLending.com or give me a call at (800) 680-7875.