Vail mortgage column: Using assets as income for a mortgage loan
The rules to get a mortgage are continuing to progress from the rather draconian standards that evolved after the 2007 financial crisis. For several years, common sense had little to do with getting a mortgage loan. There was a one-size-fits-all mentality that made it difficult for borrowers who were otherwise qualified to get a mortgage loan for one reason or another.
Recently, a new rule came out regarding borrowers with plenty of liquid assets but minimal taxable income. Mortgage lenders are now allowed to factor into the income side of the equation a hypothetical monthly draw down of liquid assets and call it income.
While this has always been allowed, to a degree, for retired borrowers, there were strict rules that the assets had to be in a retirement account and other guidelines. Now, borrowers who are still working can take advantage of this approach. It won’t work for everyone, and you need a substantial amount of liquid assets, but it can be a lifesaver for some.
Let’s look at an example. A borrower has $900,000 in liquid assets and wishes to buy a home for $750,000. Our borrower also has monthly car payment of $500 and no other debt. The taxes, insurance and homeowners’ association dues will cost $600. He wishes to put $150,000 down and get a loan for $600,000 with payments of $2,907. To qualify on his income, he needs about $107,000, but he only shows an income of $95,000. We are $1,000 per month short on income.
So the lender would look at how much money would the borrower have to draw out of the remaining $750,000 liquid assets to make up that income shortage over the 30-year term of the loan and note that amount is $360,000 ($1,000 x 360 months).
The lender is now allowed to assume that the borrower can draw $1,000 per month from assets, if needed, and not run out of money during the course of the loan and list it under the income column on the loan application. It’s called asset depletion.
For a retired borrower, there is a different calculation, and the presumed income stream may only have to go on for 36 months, which would require far less in liquid assets, but there are some tricky maneuvers to make that work.
Clearly, this strategy is not going to work for everyone, but it can work wonders for some in accomplishing their goals. Frequently, I spend several hours running scenarios and conferring with different lenders to find the right solution for a borrower with unique circumstances. If your situation is even slightly more complicated than reading your paystub and credit report to determine if you are eligible for a mortgage, you need to work with a loan originator who is willing and able to think outside of the box.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.
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