Using Assets to Qualify for a Mortgage

Asset Based Income

Buying a home and getting a home loan these days is not as straightforward as it once was. There was a time when it was sufficient to simply document your income from your one job. Today things are not always that simple. Sometimes you need to cobble together as many sources of “qualifying income” as possible to qualify for a mortgage. This is especially true for people who are retired, heavily invested, or working in less “traditional” ways.

There are four basic methods for turning your assets into qualifying income for a new mortgage.

1. Non-qualified funds – Non-qualified funds are funds that are NOT in a “qualified” retirement account like an IRA, 401k, 403b and others. These include money in a savings account, mutual fund or other investments.  These generate capital gains, interest, and dividends. These funds can be used for mortgage qualification using two years of documented tax returns. The average of the two years can be added to the annual qualifying income.

Example: if you had $11,000 of capital gains last tax year and $13,000 this tax year you would have an average of $12,000 or $1000/mth of additional qualifying income.

2. Non-qualified funds (method two) – The total value of the funds in an investment portfolio (not including IRA, 401K or other qualified funds) can be used for mortgage qualification. With this method, you first subtract any funds needed for closing costs & reserves from the total value, then divide by the term of the loan in months and that amount is added to the borrower’s qualifying income.

Example: if you have $400,000 in investments and need $35,000 for down payment and $5000 for the closing cost you are left with $360,000 of qualifying income ($400,000 – $35,000 – $5,000). Divide the $360,000 by 360 months (term of the loan) and there is  $1000/mth of additional qualifying income.

3. Qualified funds, like IRA and 401k – Individuals of retirement age who have “unrestricted access” (meaning they are eligible to withdraw without penalty) to their IRA and/or 401K accounts can use those funds as qualifying income. In this method, income is documented via a distribution from the qualified funds to a non-qualified account and a letter from the Financial Advisor to verify the amount and frequency of future distributions. The funds only need to be sufficient to sustain the withdrawal rate for 3 years.

Example: if you need $1000/mth additional income to qualify you would need to start with an IRA (or other retirement accounts) with a minimum of $36,000 liquid funds (36 months X $1000).

4. Trust income – Beneficiaries of a trust can use those funds as qualifying income. In this method, income is documented via a distribution from the trust funds to a personal account and a letter from the trustee or copy of the trust agreement to verify the amount and frequency of future distributions. The funds need to be sufficient to sustain the withdrawal rate for 3 years.

Example: if you need $1000/mth additional income to qualify you would need to start with a Trust Account with a minimum of $36,000 liquid funds (36 months X $1000).

As described above, if you are of retirement age and withdrawing from a qualified account or any age withdrawing from a trust account it takes far less in terms of investment funds to generate additional qualifying income than using traditional non-qualified funds.  However, the combination of qualified, non-qualified, and trust funds may all be used in addition to any traditional income you have.

For more information contact Aaron Walker or Jay Rapson at Aaron Lending, LLC.