Asset depletion formula used to calculate qualifying income for a mortgage using investment assets

The asset depletion formula is used by lenders to convert verified assets into a qualifying monthly income for mortgage approval. This approach is helpful for retirees, early retirees, and borrowers with strong assets but limited traditional income. What many buyers do not realize is that asset depletion calculations are allowed not only in Non-QM lending, but also under certain conventional guidelines.

This article focuses specifically on how the asset depletion formula works and how qualifying income is calculated using assets.

What Is the Asset Depletion Formula?

The asset depletion formula takes eligible assets and spreads their value over a defined period of time to create a monthly income figure. That income is then used for standard underwriting calculations, including debt-to-income ratios.

The basic structure looks like this:

Eligible Assets ÷ Depletion Term = Monthly Qualifying Income

How assets are defined, adjusted, and divided depends on the loan program.

Asset Depletion Under Conventional Loan Guidelines

Both Fannie Mae and Freddie Mac allow asset depletion income under specific circumstances.

Conventional asset depletion is typically used when a borrower:

  • Is retired or not actively employed
  • Has significant liquid or retirement assets
  • Needs supplemental or replacement income

Common Conventional Asset Rules

While guidelines vary slightly, conventional programs often include:

  • Eligible assets such as checking, savings, brokerage, and retirement accounts
  • Retirement assets discounted to account for taxes or accessibility
  • Assets divided by a fixed term, commonly 360 months

Conventional Example

  • Eligible assets after adjustments: $900,000
  • Depletion term: 360 months

$900,000 ÷ 360 = $2,500 per month

That $2,500 is added to any other qualifying income sources and used for underwriting.

Conventional asset depletion can be conservative, but it works well for borrowers with strong credit profiles and modest loan amounts.

Asset Depletion in Non-QM Lending

Non-QM asset depletion loans offer more flexibility than conventional programs. These options are commonly used when conventional guidelines do not allow enough qualifying income or when asset structures are more complex.

Non-QM asset depletion loans may allow:

  • Higher percentages of retirement assets to be used
  • Shorter depletion terms such as 240 months
  • Fewer restrictions on asset type or seasoning
  • No requirement for traditional income sources

Because these loans are not governed by agency rules, underwriting is more flexible and often better suited for high-asset borrowers.

Step-by-Step Asset Depletion Calculation

Regardless of loan type, the calculation generally follows three steps.

Step 1: Identify Eligible Assets

Commonly accepted assets include:

  • Checking and savings accounts
  • Brokerage accounts with stocks, bonds, or mutual funds
  • Retirement accounts such as IRAs and 401(k)s

Assets like real estate equity or business accounts are usually excluded unless specifically allowed by the program.

Step 2: Apply Asset Adjustments

Lenders apply adjustments before calculating income.

  • Retirement accounts are often reduced by 30 to 40 percent
  • Volatile investments may be discounted
  • Recently deposited funds may require seasoning

Step 3: Divide by the Depletion Term

Assets are divided by an approved term.

  • 360 months is common for conventional loans
  • 240 months is frequently used for Non-QM loans

Shorter terms result in higher qualifying income.

Sample Non-QM Asset Depletion Example

  • Total verified assets: $1,500,000
  • Retirement adjustment: $300,000
  • Adjusted assets: $1,200,000

Using a 240-month term:

$1,200,000 ÷ 240 = $5,000 per month

That $5,000 becomes the qualifying income used for mortgage approval.

How Debt Still Affects Qualification

The asset depletion formula creates income, but monthly obligations still matter.

Debts considered include:

  • Housing payments
  • Auto loans
  • Credit cards
  • Installment loans

These obligations are measured against the calculated income to determine overall affordability. Educational resources from the Consumer Financial Protection Bureau explain how lenders evaluate repayment ability.

Choosing the Right Asset Depletion Option

The right asset depletion approach depends on:

  • Asset mix and liquidity
  • Desired loan amount
  • Credit profile
  • Comfort with conventional versus Non-QM guidelines

Industry insights from the Mortgage Bankers Association highlight how asset-based lending can be structured responsibly when properly documented.

Asset Depletion Loans in Colorado

Asset depletion strategies are commonly used in Colorado markets such as Centennial, Greenwood Village, Highlands Ranch, Castle Pines, and across the Denver metro area. Whether a conventional or Non-QM option is the better fit often comes down to how the asset depletion formula is applied.

If you want to understand how your assets translate into qualifying income under current guidelines, a personalized asset depletion calculation can provide clarity before you apply. Contact us at rbaxter@choicemortgage.com or (303) 670-0137 for a personal consultation.

For more educational mortgage articles, visit our blog.

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