What This Guide Covers
- How asset depletion income is calculated under Fannie Mae guidelines
- Which assets are eligible and which are discounted or excluded entirely
- Non-QM lenders that use more favorable asset depletion formulas
- Who benefits most from asset depletion and when it makes sense to use it
How Asset Depletion Income Is Calculated
Asset depletion, also called asset dissipation or asset amortization, is a method for calculating qualifying income based on liquid assets rather than monthly earnings. The premise is that a borrower with substantial savings can theoretically draw down those assets over the loan term to make mortgage payments, even without a traditional income stream.
Fannie Mae's asset depletion formula: (eligible assets minus down payment and closing costs) divided by the remaining loan term in months equals monthly qualifying income.
Example: A retired borrower has $900,000 in eligible liquid assets. The purchase requires a $100,000 down payment and $15,000 in closing costs. Eligible assets for the formula: $900,000 minus $115,000 = $785,000. Divided by the 360-month loan term (30 years): $785,000 / 360 = $2,180 per month in qualifying income.
This $2,180 per month can be combined with any actual income the borrower receives (Social Security, pension, interest and dividends) to reach the total qualifying income figure.
The two-year asset history requirement means the borrower must have held these assets for at least 24 months. Sudden large deposits or asset transfers immediately before application will be questioned.
Required Documentation
- ✓Two months of complete account statements for all eligible asset accounts
- ✓For retirement accounts: statements plus documentation confirming the borrower is at least 59.5 years old (to apply the 70% inclusion rate)
- ✓Evidence of 24-month asset ownership if any large recent deposits appear
- ✓Down payment and closing cost sources documented separately from the depletion asset pool
- ✓Tax returns showing interest, dividend, and capital gain income from the asset accounts
- ✓CPA letter if asset structure is complex (trusts, business accounts, brokerage with restricted shares)
What Most Lenders Get Wrong
- 1.Applying the retirement account discount incorrectly. Fannie Mae allows 70% of retirement account balances for borrowers age 59.5 or older (past early withdrawal penalty age) and 60% for younger borrowers. Using the full balance overstates eligible assets; using the wrong percentage incorrectly under- or over-counts.
- 2.Including assets that must be reserved for closing costs and down payment in the depletion calculation. The eligible asset base is reduced by the funds the borrower must bring to closing. An underwriter who does not subtract these costs inflates the qualifying income figure.
- 3.Not offering asset depletion at all because it is not in their system. Many retail lenders, banks, and credit unions do not underwrite asset depletion loans because their software does not support the calculation. Wholesale lenders, particularly those with portfolio products, are the primary market for this loan type.
- 4.Requiring the borrower to actually liquidate assets. Asset depletion is a qualifying methodology, not an instruction to sell everything. The borrower does not liquidate the assets; they simply demonstrate that the assets exist and are sufficient to support the calculated income figure.
Eligible vs Ineligible Assets: The Distinctions That Change the Calculation
Not all assets count toward the asset depletion pool, and some count at a discounted rate. Getting the eligible asset calculation right determines whether the methodology works for a given borrower.
Fully eligible at 100%: checking accounts, savings accounts, money market accounts, CDs, taxable brokerage accounts with publicly traded securities (using 70% of the market value to account for potential liquidation taxes), gift funds that have already been deposited, and funds from the sale of real property.
Eligible at 70% for borrowers 59.5 or older: IRA, 401(k), 403(b), SEP-IRA, and other qualified retirement accounts. The 30% discount accounts for early withdrawal penalties and taxes that would apply if funds were liquidated. For borrowers under 59.5, the eligible percentage drops to 60%.
Not eligible: unvested stock options, non-vested restricted stock units, assets held in irrevocable trusts where the borrower does not have direct access, business assets that cannot be withdrawn without affecting the business, and real property that has not yet been sold.
Some non-QM lenders have more generous formulas. A common non-QM approach divides eligible assets by 60 months (5 years) rather than the full 360-month loan term, which produces a much higher monthly income figure and requires far fewer assets to qualify for a given loan amount.
Who Benefits Most from Asset Depletion
Asset depletion is the right tool for a specific borrower profile: substantial liquid assets, limited or irregular income, and a desire to purchase a home without depleting the asset base to make a larger down payment.
The most common candidates are retirees who have accumulated retirement accounts and other savings but have transitioned out of earned income. Their monthly pension, Social Security, and investment distributions may not be sufficient alone for the target loan amount, but when asset depletion income is added, the combined qualifying income crosses the threshold.
A second profile is the business owner who takes minimal salary for tax planning purposes. Their business may have significant value, but that value is not liquid and does not qualify under standard asset depletion formulas. If they also have substantial personal liquid assets separate from the business, asset depletion can bridge the gap between their low documented income and their actual financial capacity.
A third profile is the borrower who recently sold a business, investment property, or inherited a large sum. These individuals have concentrated liquid wealth but limited income history from that wealth. Asset depletion allows them to purchase immediately after a liquidity event rather than waiting years for investment income history to accumulate.
For Kern County borrowers, particularly those in the oil industry who have accumulated significant assets during high-earning years and are approaching or in retirement, asset depletion is a planning tool worth understanding early, not discovering after the fact when a purchase opportunity appears.
Asset depletion is one of the most underutilized tools in the mortgage toolkit. I see borrowers with $1 million or more in liquid assets who are told they do not qualify because their tax return shows low income. The income is already there, sitting in their accounts. It just needs to be recognized correctly. Finding the right lender who actually offers asset depletion qualifying is part of the work, because most retail banks and credit unions will never mention it.
Do you have significant savings and want to know if asset depletion can help you qualify?
Call Dan at (661) 342-9381. He will review your specific situation and documentation in a free call.