Asset depletion loans: qualify for a mortgage using your savings as income

What is an alternative documentation (alt-doc) mortgage?

A traditional mortgage proves income with pay stubs, W-2s and, for business owners, two years of tax returns. That works well for someone on salary. It works poorly for a 64-year-old who just retired with a large 401(k) and no paycheck, or a contractor paid on 1099s.

Alternative documentation loans use a different kind of proof. Some turn assets (savings and investments) into a monthly income figure. Others show income with something other than full tax returns: 1099s, a profit and loss statement, or a written verification from an employer.

Here's the part I want every borrower to understand: alternative documentation is not "no documentation." Federal ability-to-repay rules require a lender to make a reasonable, good-faith decision that you can repay, based on verified information. These programs change how that's shown, not whether it is.

How does an asset depletion loan work?

Asset depletion, also called asset utilization or asset qualifier, takes your eligible savings and investments and spreads them over a set number of months. The result is a monthly income figure the lender can use to qualify you.

Each program sets every piece of that formula. This is where lenders differ the most:

• Which assets count. Checking, savings, money market, brokerage and retirement accounts are common. Crypto, business assets and restricted stock are often left out or limited.
• Haircuts (counting less than the full balance). Many Non-QM programs count only part of stock, bond or retirement balances. That accounts for market swings, taxes and early withdrawal penalties. Cash is often counted at full value.
• What's subtracted first. Money you'll use for the down payment, closing costs and required reserves (savings left after closing) is usually removed first.
• The number of months. Some programs divide by the loan term in months. Others use a shorter set number of months, which turns the same assets into more monthly income.
• Combining income. Many programs let you add asset income to Social Security, a pension or wages.

Does Fannie Mae allow assets as income?

Yes, in a limited way. Not every assets-as-income loan is Non-QM. Fannie Mae's Selling Guide, section B3-3.4-06, allows certain employment-related assets to be used as qualifying income on a conventional loan. It's narrower than most Non-QM programs. But when it fits, it can mean conventional terms.

Which assets qualify?

• Retirement accounts such as a 401(k), IRA, SEP or Keogh, as long as you have an unqualified and unlimited right to request a distribution of all the funds at the time of calculation. In plain terms: you must be able to withdraw all of it.
• Lump-sum retirement payouts and severance packages, documented with the employer's distribution letter (Form 1099-R) and deposited into a verified account. Checking and savings balances count only when the money came from an eligible source like this.

Assets that don't qualify under this section include stock options, non-vested restricted stock, inheritances, lawsuit or lottery money, real estate sale proceeds, divorce proceeds and virtual currency.

How does Fannie Mae figure it?

1. Start with eligible assets.
2. Subtract any early-withdrawal penalty that would apply if you took out everything at the time of calculation.
3. Subtract money used for the down payment, closing costs and required reserves. What's left is called net documented assets.
4. Divide by the loan's term in months.

Fannie Mae's own example: a $500,000 IRA with a $50,000 penalty, minus $100,000 for closing, leaves $350,000. Divided by 360 months, that's $972.22 a month.

The limits

• Loan purpose: purchase and limited cash-out refinance only.
• Occupancy: primary home and second home only.
• Loan-to-value: lower limits on LTV (how much you borrow compared with the home's value) than standard conventional loans. The limit is a bit higher when the owner of the assets is at least 62 at closing.
• Use: for retirement accounts, only when a distribution isn't already set up, or the current distribution isn't enough to qualify.

If the loan doesn't fit those rules, Fannie Mae points to its retirement income and interest-and-dividend income rules as other ways the same assets might be considered.

What are 1099-only, P&L-only and written VOE loans?

These are Non-QM programs that show income without the full tax return package. Each solves a different problem.

1099-only

Made for independent contractors, commissioned salespeople, consultants and gig workers paid on Form 1099. Instead of tax returns, the lender usually uses one or two years of 1099s. Because 1099 income is before expenses, the lender applies an expense factor to estimate what you actually keep. Programs differ on the expense factor, whether they check 1099 income against bank deposits, and how they handle a change in who pays you.

P&L-only

For business owners, income is shown with a profit and loss statement for the business. Many programs require the P&L to be prepared or signed by a CPA, enrolled agent or licensed tax preparer. Some also want a few months of bank statements to back it up. Ownership and how long the business has been open are usually checked too.

Written VOE only

For wage earners whose employer will fill out a written verification of employment (VOE) covering income and job history, without pay stubs, W-2s or tax returns. People often use it when they'd rather not share tax returns, or when their tax returns show unreimbursed business deductions that make their pay look lower. Expect the lender to check the employer on its own. Borrowers who work for a family member or their own company are usually not eligible.

Who is an asset depletion or alt-doc loan good for?

• Recent retirees. You have large retirement savings but haven't started regular withdrawals, so there's little income on paper.
• Wealthy borrowers. Your money is in investment accounts, and your taxable income is low on purpose.
• Early retirees and career changers. You're between careers or living on savings while starting something new.
• Independent contractors. Your income is on 1099s and your tax returns show big business deductions.
• Business owners with a short or messy tax history. A CPA-prepared P&L tells a clearer story than last year's return.
• Salaried employees with large unreimbursed expenses. A written VOE shows what you're actually paid.

How do you qualify for an asset depletion loan?

Every alternative documentation loan still has to meet the federal ability-to-repay rule. Under Regulation Z, lenders consider eight factors: current or expected income or assets, current employment status, the monthly payment on the loan, payments on any simultaneous loans, mortgage-related obligations like taxes and insurance, current debts and other obligations, the debt-to-income ratio or residual income, and credit history.

The rule also says lenders must verify the income or assets they rely on using reasonably reliable third-party records. Financial institution records and employer records are both listed examples. That's part of why account statements and written VOEs can work.

Beyond that, expect lenders to weigh:

1. Credit score and history. Affects pricing and the most you can borrow compared with the home's value.
2. Equity or down payment. Alternative documentation programs usually require more equity than full-documentation loans.
3. Reserves. Months of house payments left in savings after closing.
4. DTI (debt-to-income ratio). How much of your monthly income goes to debt payments. Asset income still has to cover the payment and your other debts.
5. Seasoning of assets. Lenders usually want money that's been in your name for a while, shown with back-to-back monthly statements.

What documents do I need?

• Government-issued photo ID and permission to pull credit
• Asset depletion: recent back-to-back statements for every account being used, showing the owner and what the account holds
• Retirement accounts: plan terms or other proof you can access the money, if the statement doesn't show it
• Lump-sum payout or severance: the employer's distribution letter (Form 1099-R) and proof of deposit
• 1099-only: your 1099s for the years the program requires
• P&L-only: a P&L prepared or signed as the program requires, plus proof you own the business
• Written VOE: the completed verification from your employer
• Purchase contract, or for a refinance, your current mortgage statement

How much do I need for a down payment?

Expect to bring more equity to an alternative documentation loan than to a full-documentation conventional loan. Lenders handle the extra uncertainty partly through lower loan-to-value limits.

With asset depletion, there's a built-in tug-of-war. The money you put down comes out of the same pool that creates your qualifying income. A bigger down payment lowers the loan amount and payment. It also lowers the assets left to count. I run several down payment scenarios side by side to find the right balance.

Asset depletion and alt-doc loan pros

• Qualify on the wealth you've built, not just a paycheck
• No need to start retirement withdrawals just to qualify
• Tax returns usually not required on 1099-only, P&L-only and written VOE programs
• Asset income can often be combined with Social Security, pension or wages
• A conventional path exists through Fannie Mae B3-3.4-06 for eligible employment-related assets

Asset depletion and alt-doc loan cons

• Higher cost on Non-QM versions. Expect pricing above a similar full-documentation conventional loan.
• Haircuts can shrink your numbers. A large retirement balance may produce less qualifying income than you'd expect after haircuts and subtractions.
• Prepayment penalties are possible (a fee for paying off early) on some Non-QM loans, especially for rentals.
• Rules vary widely. Two programs can produce very different income from the same statements.
• Fannie Mae's version is narrow. Only employment-related assets, lower loan-to-value limits, and no cash-out refinances.
• Do-it-yourself paperwork usually isn't enough. P&L programs commonly require a tax professional's involvement.

Asset depletion vs. 1099-only vs. P&L-only vs. written VOE: which is better?

For a wider look at this category, see my guide to Non-QM loans.

Common questions about asset depletion & alternative documentation

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