How is the Monthly Qualifying Income Calculated for asset depletion
How is the Monthly Qualifying Income Calculated for asset depletion. The core mechanism for qualification is converting the borrower’s verifiable liquid assets into an imputed, or calculated, monthly income stream.
Asset Depletion Loans are specialized Non-Qualified Mortgages (Non-QM) designed for individuals who are asset-rich and income-light, such as recently retired professionals or investors living off their portfolios, who lack traditional W-2 or tax return income.
How is the Monthly Qualifying Income Calculated for asset depletion.The Core Calculation Formula (Asset Amortization)
The calculation converts the borrower’s net accessible wealth into a stable, monthly income stream by amortizing it over a fixed period, typically assuming no rate of return. This calculated installment is then used to meet the income requirements for the loan.
A. Standard Amortization Period
The most common formula used for the Asset Depletion calculation amortizes the available net assets over a seven-year period:
Net Qualifying Assets÷84 Months=Imputed Monthly Income
This Asset Amortization Income may be used with other sources of income or independently, depending on the program.
B. Alternative Amortization Periods (Program Variations)
The amortization term used can vary significantly based on the program, the borrower’s risk profile (DTI), and whether the borrower wishes to set up formal distributions:
| Scenario/Program | Amortization Term (Months) | Calculation |
| Asset Utilization (Horizon Elite Jumbo) | 84 Months | Monthly Income = Net Qualified Assets / 84 Months |
| Passive Asset Utilization (General) | 120 Months (10 Years) | For borrowers who do not wish to set up asset distributions, assets are divided by a 10-year term |
| Asset Amortization (Edge Series) | 60 Months (5 Years) | Qualified assets with a utilization draw schedule of 5 years (Qualified Assets divided by 60) |
| Horizon Alt Doc – Low DTI Scenario | 36 Months | Used when the DTI without asset utilization is ? 60% |
| Horizon Alt Doc – High DTI Scenario | 60 Months | Used when the DTI without asset utilization is > 60% OR when the borrower’s entire income is comprised of income from assets |
| Foreign National Borrowers | 60 Months | Monthly Income = Net Qualified Assets / 60 Months |
| Asset Depletion (Prime NQM) | 120 Months | Qualified Assets divided by 120 (ten (10) year utilization draw schedule) |
| Asset Depletion (General) | 360 Months | Monthly ‘income’ is calculated by dividing total liquid assets by 360 months (the duration of most mortgage loans) |
Calculating Net Qualifying Assets (The Numerator)
The determination of the “Net Qualifying Assets” requires applying discounts (“haircuts”) to certain asset types and excluding funds needed for the transaction itself.
A. Exclusions from Net Assets
Before the calculation can be performed, specific funds must be subtracted from the borrower’s total available assets:
- 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.
- Existing Income: Assets cannot be used as another source of income (e.g., capital gain) if that income is already being used to qualify. Accounts utilized for Asset Amortization or Passive Asset Utilization may not be used for dividends, interest, capital gains, or other income sources.
B. Asset Discounting (Haircuts)
Eligible assets are verified based on their liquidity, and some are discounted when calculating the net value used in the amortization formula:
| Asset Type | Percentage of Asset Counted |
| Depository Accounts (Checking, Savings, Money Market, CDs) | 100% of face value |
| Marketable Securities (Publicly Traded Stocks/Bonds/Mutual Funds) | 80% of remaining value |
| Life Insurance | 100% of cash surrender value (less surrender charge) |
| Retirement Accounts (? 59 ½) | 80% of the vested balance (or 70% in some programs, or 100% if a depository account in some programs) |
| Retirement Accounts (< 59 ½) | 70% of the vested balance (or 60% or 90% if a depository account in some programs) |
Note: For Prime NQM, 80% is used for all retirement assets regardless of age, provided the assets meet FNMA criteria for unrestricted access.
C. Ineligible Assets
Documentation and calculation requirements explicitly exclude certain asset types:
- Business Assets.
- Gift Funds.
- Unseasoned Foreign Assets.
- Non-marketable/Restricted Securities (e.g., private investments, restricted stock, stock options).
- Windfall (e.g., lottery winnings, inheritance).
- Cash-out proceeds from the transaction itself.
Utilization of the Imputed Monthly Income
The resulting Imputed Monthly Income is used to establish repayment capacity for the mortgage application:
- Debt-to-Income (DTI) Calculation: The imputed monthly income is entered as the borrower’s gross income to calculate the Debt-to-Income (DTI) ratio.
- Asset Qualifier: For programs utilizing the Asset Qualifier option, the assets are instead divided by a term (often 60 months) and then used to calculate the Residual Income, which must meet a minimum threshold (e.g., $1,300 per month), as no DTI is developed for this product.
- Continuance: We must verify that the income derived from the depleting assets is expected to continue for a minimum of three years from the note date.
- Sole Source Requirement: For programs such as NQM Funding’s Flex Supreme, asset depletion is not supplemental and must be used as the sole source of income; it cannot be combined with other employment income sources.
FAQ's
Some programs, such as the our Non-QM Edge Series, use a utilization draw schedule of 60 months (5 years), and the Non-QM Connect Asset Qualifier program divides assets by 60 months.
It depends on the program. While Asset Amortization Income can sometimes be used with other income sources, some strict guidelines require asset depletion to be the sole source of income.
No. Assets utilized for depletion cannot be used for qualifying income derived from those accounts, such as interest, dividends, or capital gains, in addition to the amortization calculation.
The resulting imputed amount is used as the borrower’s monthly income for qualifying and is typically entered into the Debt-to-Income (DTI) ratio calculation.
For passive asset utilization, where borrowers do not set up formal distributions, the assets may be divided by a 10-year (120 month) term.
For borrowers under age 59 ½, vested retirement assets are commonly discounted to 70% of their vested balance, although some guidelines use 60%.
Vested retirement accounts for borrowers of retirement age (≥ 59 ½) are typically counted at 80% of their vested balance.
Funds needed for the down payment, closing costs, and required reserves must be excluded from the total assets before the calculation is performed.
The standard amortization period is 84 months, which represents seven years.
The most common formula used is dividing the Net Qualifying Assets by 84 Months to determine the Imputed Monthly Income, assuming no rate of return.
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