When you apply for a mortgage, most people naturally think about their paycheck. How much do I earn? What does my tax return show? How much income can the lender use? But what if your income doesn’t tell the whole story about your financial strength?
A new Freddie Mac guideline change creates an important opportunity for borrowers who have substantial savings, investment accounts or other eligible assets.
In certain situations, those assets can now be converted into qualifying income for a mortgage. In other words, the lender may be able to look at not only what you earn, but also what you’ve accumulated.
Turning Assets Into Qualifying Income
The concept is often called “asset depletion” or “asset-based income.” The idea is relatively simple: instead of requiring you to actually withdraw money from your investment accounts every month, the lender calculates a monthly income amount based on a portion of your eligible assets.
For example, suppose you have $1,000,000 in eligible assets. Under the revised Freddie Mac calculation, a simplified example would divide that amount by 180 months, producing approximately $5,556 per month of qualifying income.
You aren’t necessarily required to spend $5,556 each month. The calculation simply allows a portion of your assets to be recognized as income for mortgage qualification.
The New Calculation Can Make a Big Difference
This is where the change becomes particularly interesting.
Freddie Mac previously used a 240-month calculation for this type of asset qualification. The new 180-month calculation means the same amount of assets can produce roughly 33% more qualifying income. For example, $1 million of qualifying assets would have produced about $4,167 per month under a 240-month calculation.
Under the new 180-month calculation, that becomes approximately $5,556 per month. That’s an additional $1,389 per month of qualifying income without the borrower having to earn another dollar from employment.
You Can Combine Assets With Other Income
Perhaps the biggest benefit is that asset-based income doesn’t necessarily have to stand alone. It can potentially be combined with other qualifying income sources.
Imagine a borrower earning $5,000 per month from employment who also has $1,000,000 in eligible assets. If the assets generate approximately $5,556 per month under the applicable calculation, the borrower could potentially have more than $10,500 per month in qualifying income before considering other applicable income sources and underwriting requirements.
This can make a meaningful difference for someone whose traditional income alone isn’t enough to qualify for the home they want.
Investors Have a New Opportunity, Too
The change is particularly noteworthy for real estate investors.
The revised Freddie Mac guidelines expand the use of accumulated assets as income to investment property transactions, creating a conventional financing opportunity that wasn’t previously available under this particular asset-based approach.
That’s significant for an investor who has substantial assets but whose traditional income doesn’t support the additional mortgage debt they want to take on.
Here’s an Example for an Investment Property
Let’s say an investor wants to purchase a $600,000 rental property and has $1.5 million in eligible investment assets.
After accounting for the funds required for the purchase and other applicable requirements, suppose $1,200,000 remains available for the asset-income calculation. Dividing $1.2 million by 180 produces approximately $6,667 per month in qualifying income.
That income could potentially be combined with the borrower’s employment income and eligible rental income to help qualify for the mortgage.
The exact maximum loan-to-value, reserve requirements and qualifying income will depend on the transaction and the automated underwriting results, but the important point is that investment property borrowers now have another conventional option to explore
This Could Be Especially Valuable for Retirees and High-Net-Worth Borrowers
Consider someone who has spent decades building a retirement portfolio but doesn’t have a large traditional monthly income.
Maybe they receive Social Security, a pension or investment income, but their taxable monthly income doesn’t accurately reflect their financial resources. A borrower could potentially have hundreds of thousands—or even millions—of dollars in retirement and investment assets while appearing to have relatively modest monthly income.
Asset-based qualification provides another way to look at that financial picture. Of course, not every asset qualifies, and there are specific documentation, accessibility and underwriting requirements, so the actual calculation must be reviewed on a case-by-case basis.
Conventional Financing Isn’t Always the Only Answer
It’s also important not to assume that Freddie Mac’s new approach will automatically be the best option for every borrower.
There are Non-QM and other specialized mortgage programs that have offered asset-based qualification for years, and some may use shorter asset-depletion periods that produce substantially more qualifying income. The tradeoff can be higher rates, different down-payment requirements or other program restrictions.
The right question isn’t simply, “How much can I qualify for?” It’s “Which financing strategy makes the most sense for my overall financial goals?” That’s where comparing multiple options becomes important.
Your Balance Sheet Could Be More Powerful Than You Think
The biggest takeaway is simple: your mortgage qualification isn’t necessarily limited to your paycheck.
If you’ve accumulated significant savings and investments, those assets may be able to help you qualify for a mortgage—even when your traditional income doesn’t tell the entire story. And because the revised Freddie Mac rules can be used in conjunction with other qualifying income and can now extend to investment properties, this creates another tool for homebuyers, retirees and real estate investors.
If you have substantial assets but have been concerned that your income may not be high enough to qualify, it’s worth having a mortgage professional look at the entire picture before assuming you can’t qualify.
Reach out to me directly—I’d love to talk strategy and explore how we can utilize these new regulations to help you succeed.
As always, you can set up an appointment with me here…
The blog postings on this site represent the positions, strategies or opinions of the author and do not necessarily represent the positions, strategies or opinions of Starlight Mortgage. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deductions.
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