Documentation for asset depletion loans
Documentation for Qualifying Assets and Imputed Income
The primary objective of documentation for Asset Depletion loans is to verify the existence, ownership, and stability of the borrower’s wealth, which is then mathematically converted into qualifying income.
A. Eligible Asset Documentation
We require detailed statements to verify the assets that will be used in the calculation of Imputed Monthly Income:
- Acceptable Asset Types: Documentation is required for various accounts, including Checking and savings accounts, Money market accounts, Mutual funds, Stocks and bonds, and Retirement accounts (401(k), IRA).
- Depository Accounts: Documented at 100% of face value.
- Marketable Securities: Publicly traded stocks, bonds, and mutual funds are typically discounted and counted at 80% of their remaining value.
- Life Insurance: The cash surrender value of life insurance is generally eligible at 100%.
- Cryptocurrency: Bitcoin may be eligible, but it typically must be liquidated and deposited into a U.S. bank account and seasoned for a minimum of 60 days. Other cryptocurrencies are generally ineligible.
B. Retirement Account Documentation (Subject to Restrictions)
Retirement accounts are eligible, but the documentation must address accessibility and value:
- Vested Funds: We must verify that the retirement account is vested and allows withdrawals regardless of current employment status.
- Discounting: Retirement accounts are typically subject to a discount or “haircut”. Documents are required to support the discounted value, which is generally 70% of the vested balance, or 80% if the borrower is of retirement age (? 59 ½).
- Ineligible Use: Income from interest, dividends, or capital gains derived from an account cannot be used for qualification in addition to the asset utilization calculation derived from the same accounts.
Asset Verification and Seasoning Requirements
To ensure the reliability of the assets used, strict verification and aging requirements apply:
- Seasoning Period: Assets must be seasoned for a minimum of 90 days. Some guidelines require three (3) months’ seasoning of all assets.
- Account Location: Assets must be located in a U.S. bank or financial institution.
- Statement Requirements: Asset statements provided must typically cover a minimum consecutive 60 days. For some programs, four months statements are required. The most recent statement may need to be dated within 60 days of the note date.
- Joint Accounts: If accounts are jointly held, the proportionate share of any accounts held jointly with non-borrowers may be used. All individuals on the account must generally be on the note and mortgage.
Documentation of Exclusions and Reserves
Underwriters must document not only the eligible assets but also funds that are restricted or ineligible for the depletion calculation.
A. Funds to be Excluded
The documentation must clearly separate qualified funds from necessary or ineligible funds:
- Transaction Costs: Funds needed for the down payment, closing costs, and required reserves must be excluded from the net assets available for the depletion calculation.
- Sourcing Large Deposits: Any deposits greater than 10% of the face value of the account or exceeding 50% of the average monthly deposits must be sourced and documented to ensure they did not result from undisclosed debt.
- Ineligible Transfers: Transfers between personal accounts must be excluded. Gift funds or funds from business accounts are generally ineligible for the depletion calculation.
B. Reserves Documentation
Asset Depletion is an Alt Doc loan type, and while some specific programs (like Asset Depletion and Asset Qualifier in the Sharp Series) state that reserves are not required, general Alt Doc guidelines often mandate reserves as an ATR factor:
- Reserve Requirement: Alt Doc loans generally require 6 months of PITIA (Principal, Interest, Taxes, Insurance, HOA) reserves for loan amounts up to $1.5 million.
- Documentation: Reserves must be documented with asset statements and may include eligible retirement accounts, although often reduced by a percentage to reflect potential taxes or penalties.
Supporting Documentation (ATR Compliance)
The ATR rule requires verifying several factors beyond just assets, even when DTI is based on depletion.
- Credit Report: A merged credit report is mandatory for every borrower who executes the note, verifying their credit history. Asset Depletion loans typically require a strong credit profile, often 680 or higher.
- Liabilities Documentation: Documentation of all current liabilities is required to calculate the DTI or residual income. This includes ensuring that any debt secured by the financial assets being used (e.g., a 401k loan) is properly excluded or accounted for, requiring a copy of the applicable loan instrument.
- Occupancy Certification: Documentation is required to verify the occupancy status, as Asset Depletion/Asset Qualifier loans are typically restricted to Owner Occupied (OO) and Second Homes and require compliance with all asset documentation guidelines. Loans using Asset Utilization are generally not eligible for Cash-Out Refinance transactions.
FAQ's
Bitcoin must generally be liquidated and deposited into a U.S. bank account, and documentation must include an account statement with 60 days of activity verifying the sale and receipt of funds into the borrower’s bank account.
Marketable securities (publicly traded stocks/bonds/mutual funds) are often discounted and counted at 80% of their remaining value.
Any large deposit not consistent with the borrower’s employment, earnings or savings profile must be fully explained and sourced with acceptable documentation. Some guidelines define a large deposit as one greater than 10% of the face value of the account.
Vested retirement assets are typically discounted: 70% is counted for all vested retirement assets, though some programs may allow 80% if the borrower is of retirement age (≥ 59 ½).
Ineligible assets include business accounts, unseasoned foreign accounts, restricted stock, and gift funds.
The documentation must show that funds needed for the down payment, closing costs, and required reserves must be excluded from the total Net Qualifying Assets.
Acceptable assets include checking and savings accounts, money market accounts, mutual funds, stocks and bonds, and retirement accounts (401(k), IRA). |
Asset documentation is generally valid for 90 days, but some guidelines allow asset statements to be valid for up to 120 days prior to the note date.
Assets must typically be seasoned for at least 90 days, or three (3) months, and must be located in a U.S. bank or financial institution.
The primary goal is to provide evidence of asset ownership, statements, or appraisals to support the asset values included in the calculation, thus fulfilling the Ability-to-Repay (ATR) assessment required for all Non-QM loans. |
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