Advantages and Disadvantages of Asset Utilization Loans
Advantages and Disadvantages of Asset Utilization Loans
Asset Utilization loans (also known as Asset Depletion or Asset Dissipation loans) are mortgage products that convert a borrower’s liquid wealth into a calculated monthly income to qualify for financing. They are specifically designed to meet ATR requirements for borrowers who are asset-rich and income-light.
Advantages of Asset Utilization Loans
The primary benefits of Asset Depletion loans revolve around accessibility, qualification flexibility, and financial strategy, offering solutions where conventional lending fails.
A. Expanded Accessibility for Key Borrower Profiles
The most significant advantage is providing a viable mortgage option for borrowers whose income profiles are incompatible with Qualified Mortgage (QM) standards:
- Ideal for Wealthy Retirees: They are an ideal financing solution tailored for borrowers such as recently retired professionals, investors living off their portfolios, and high-net-worth individuals without a regular paycheck. For these individuals, the shift from a paycheck to portfolio-based income often complicates mortgage qualification under traditional guidelines that rely on W-2s or tax returns.
- Qualification without Employment: Borrowers who use the Asset Depletion program do not necessarily need to show other sources of income or employment if their assets are sufficient to cover the loan and living expenses.
- Alternative to Full Cash Purchase: These loans allow clients to retain liquidity by financing the home, rather than forcing them to purchase it with cash. This retention of capital can increase their purchasing power.
- Tax Benefits: Utilizing a mortgage instead of cash may allow borrowers to potentially benefit from mortgage interest tax deductions.
B. Flexible Qualification Structure
The core function of the loan provides creative solutions for documenting repayment ability:
- Imputed Income Calculation: We calculate the borrower’s qualifying income based on the value of their liquid assets by dividing a portion of the assets over a fixed term (often 84 months or seven years). This calculated amount serves as the imputed monthly income for qualification purposes.
- Flexibility in Income Blending (Program Dependent): Asset amortization income can sometimes be used with other sources of income or independently. However, some Non-QM products, like the NQM Funding’s Flex Supreme, require asset depletion to be used as the sole source of income.
- Assets Not Required to Be Liquidated: Borrowers are not required to cash in their assets right away; the calculation merely demonstrates an ability to make the mortgage and housing payments.
C. Available Loan Features
Asset Depletion loans, as a type of Non-QM loan, often allow for terms not permitted in standard QM loans:
- Loan amounts can extend up to $3 million.
- Products can be eligible for Primary and second homes.
- Interest-only (I/O) options are available.
- Some programs, like the Sharp Series, state that reserves are not required for the Asset Depletion and Asset Qualifier programs.
Disadvantages of Asset Depletion Loans
Asset Depletion loans face two main categories of drawbacks: the inherent cost and risk of Non-QM products, and the strict documentation requirements necessary to convert assets into qualifying income.
A. Higher Costs and Increased Risk
Non-QM loans carry a risk premium because they do not conform to the rigid criteria of Qualified Mortgages.
- Higher Interest Rates and Fees: Non-QM loans generally have higher interest rates. For instance, the average initial 30-year interest rate for Non-QM loans was 6.7% in 2024 compared to 6.4% for Qualified Mortgages. They also typically come with higher closing costs and may have higher underwriting fees due to the complexity of asset assessment.
- Larger Down Payments: Non-QM loans, including those using asset depletion, often have larger down payment requirements. A down payment of at least 20% or more may be required.
- Risk of Asset Loss: Borrowers should consider the potential loss of assets if they default on the mortgage payment.
B. Strict Documentation and Program Restrictions
While documentation is alternative, it is often strict, limiting the borrower’s flexibility and potential financing options:
- Ineligibility for Cash-Out Refinance: Loans using Asset Utilization are frequently not eligible for Cash-Out Refinance transactions.
- Strict Blending Rules: Some guidelines dictate that Asset Depletion cannot be combined with other employment income sources; it must be used as the sole qualifying income source.
- Asset Seasoning Mandates: Assets used for qualification must be verified as stable, typically requiring a minimum of 90 days of seasoning (three months of consecutive statements) in a U.S. bank or financial institution.
- Asset Haircuts and Exclusions:
- Vested retirement accounts are generally accepted but are typically discounted or given a “haircut” (e.g., 70% or 80% of the vested balance) for qualification, depending on the borrower’s age and access restrictions.
- Funds needed for the down payment, closing costs, and required reserves must be excluded from the net assets used for the depletion calculation.
- Ineligible assets include business accounts, unseasoned foreign accounts, restricted stock, and gift funds.
- Credit Requirements: Although they offer flexibility, Asset Depletion loans require a strong credit profile to offset the risk of alternative income documentation. A credit score of 680–700 or higher is often preferred.
FAQ's
ADL rates are typically higher than traditional QM loans because they fall under Non-QM status and are considered a higher risk investment for the lender.
Yes, ADLs can be used for refinancing existing mortgages, providing an alternative solution for homeowners with substantial assets but limited income to access better loan terms.
Non-QM loans may come with higher underwriting fees due to the complexity required for assessing and documenting assets. They may also charge more in upfront points and fees than QM loans.
Borrowers face a higher risk of defaulting because of alternative payment methods. They should also consider the potential loss of assets if they are unable to repay the mortgage.
Non-QM loans, including ADLs, often allow a higher DTI ratio than the standard 43% cap for QM loans, sometimes supporting DTI ratios up to 50%.
Under certain program guidelines (e.g., NQM’s Flex Supreme), asset depletion cannot be combined with other employment income sources; it must be used as the sole source of income.
ADLs may allow for more flexible loan repayment types, such as interest-only (I/O) payment options, which QM loans generally prohibit.
ADLs often require larger down payments than traditional financing. Borrowers should expect to need 20% or more for the down payment.
They allow borrowers to finance a home purchase while retaining their capital, as they are not required to cash in their assets right away; the calculation only demonstrates the ability to make payments.
ADLs provide a lifeline for asset-rich and income-light individuals, such as affluent retirees and investors living off their portfolios, who cannot qualify for conventional mortgages due to lacking traditional W-2 or employment income.
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