The Scenario

Our newly-retired client came to us hoping to get approved for a mortgage, but had been told that now that he was retired, he didn’t make enough money to qualify for a loan. Technically, this was true. He’d had plenty of income before he retired, but his income from Social Security and his pension were not enough to qualify him for a mortgage on the home he was interested in.

The Obstacle

Our client knew he would eventually retire from being retired and pick up some work to both supplement his income and keep him occupied. He also knew that, with his assets, he was more than financially capable of fulfilling his mortgage obligations. The issue was proving this to a lender.

The Solution

Because our client had significant assets in his retirement account but showed minimal income otherwise, the right tool for the job was a little-used tool called an “asset depletion mortgage.” This type of mortgage allows a borrower to use (i.e. deplete) their retirement accounts in order to qualify for a mortgage.

There are two different versions of this kind of mortgage. The first requires borrowers to demonstrate that they could use the asset as income over the life of the mortgage (360 months for a 30 year mortgage) and the other requires them to demonstrate that they intend to use the asset as income over the first three years of the mortgage. We went with the first kind for our client.

Our client had $500,000 in his IRA account. Knowing that number and following the lender’s guidelines, we calculated his potential additional income in 2 easy steps:

  1. Determine usable amount. Assuming 30% will be needed to cover taxes and potential devaluation of fund, the usable amount is the value of the IRA times .7: $500,000 x .70 = $350,000
  2. Determine monthly income. Dividing the usable income by the number of months of the loan yields the amount of monthly income the asset could generate:
  3. $350.000 / 360 months = $972.22 / month

Once we added that amount to his income statement, he was approved for the loan he previously thought he wouldn’t qualify for. Another satisfied customer!

An Alternative Solution

Had our client wanted to try for an even larger mortgage, we could have applied for an asset depletion mortgage based on depleting the asset over three years (36 months). If we gone this route, the process would have been slightly different.

  1. Determine usable amount. Assuming 30% will be needed to cover taxes and potential devaluation of fund, the usable amount is the value of the IRA times .7: $500,000 x .70 = $350,000
  2. Determine monthly income. Dividing the usable amount by 36, we get the monthly income amount the asset can generate over three years:$350.000 / 36 months = $9,722.22 / month
  3.  Set up monthly auto-distribution of funds from IRA. This is the most significant difference between the two versions of the asset depletion mortgage. In this scenario, the borrower must demonstrate that he actually intends to deplete the asset in order to qualify for the greater loan amount. So, after the first monthly deposit is made into his checking account, he would submit evidence that he has set up automatic monthly disbursements and that he has received the first disbursement along with his application.

The Right Tools in the Right Hands

The right tools work best in the right hands. We at AZ Mortgage Brothers have a big tool box and we not only know which ones to use when, but we also know how to use them and use them well. We are experts at finding creative ways to get our clients into the homes of their dream.Whether you’re a realtor who wants to close more sales or a home buyer with a history who wants the best possible loan you can get,  we want to help you reach your goal. Don’t hesitate to contact us and see what we can do for you. Call today!

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