Is an Asset Utilization Loan Right for You?
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Summary:
An asset utilization loan is an alternative to a traditional mortgage loan that allows borrowers to use their personal liquid assets instead of, or in addition to, regular income to qualify for a mortgage. An asset utilization loan may also be referred to as an asset dissipation loan, an asset depletion loan, or an asset-based mortgage. Asset utilization loans are typically for high-net-worth borrowers with non-traditional income sources.
Not everyone has an easily quantifiable income from a “regular” job, meaning they don’t have paystubs or tax returns that accurately report what they make in a month or a year. If you fall into this category, it can be difficult to qualify for a conventional mortgage.
However, if you have a significant amount of liquid assets, you may be able to qualify for an asset utilization mortgage loan instead. Read on to learn more about how these asset-based mortgages work, the assets that you can use as collateral and other qualifying factors you should know about.
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What is an asset utilization loan?
Most lenders use specific underwriting standards to qualify borrowers for traditional loans, such as Fannie Mae or Freddie Mac conventional loans or government-backed loans like FHA or VA. A key part of the qualification process is verifying a borrower’s monthly gross pay to make sure they can afford their monthly mortgage payments plus other living expenses.
An asset utilization loan is a mortgage program designed for people who are asset-rich but who can’t provide proof of a stable income. If you don’t work a 9-to-5 job with W-2s and tax returns, it can be difficult, if not impossible, to qualify for a traditional home loan, so asset utilization can be a great alternative.
As Ron Goforth, SVP of Mortgages at PNC Bank, explains, asset utilization is “a type of mortgage that enables borrowers to qualify based on the assumption that they may need to use their assets to cover the monthly payments. Acceptable assets can include funds in deposit accounts, investments such as real estate or stocks, or trust funds.”
How asset-based lending works
Loan amounts for asset-based mortgages can often reach into the millions, but even if you don’t collect a regular salary, you still need to prove that you can afford the house you want to purchase. With asset utilization, your lender will need to assess your assets and calculate an estimate of what your monthly wages might be. Usually, this will be based on a percentage of the value of each asset, which can vary by lender and the types of assets you own.
Your lender will also need to verify the value and ownership of your assets by looking at your bank statements, investments, and other documentation. For example, if you are a co-owner of an asset, you can typically only borrow against your portion of the asset (unless you have written permission from the other owner). So if you have a joint investment account, only half of that can count toward your asset utilization.
Pro Tip
Before you consider borrowing against your assets, you might want to talk to a financial advisor to find out approximately what your assets are worth. This will give you a better idea of how much you have to work with and, therefore, what size home loan you can afford.
Who should apply for an asset utilization loan?
As mentioned previously, these types of mortgages are best for borrowers who don’t have a normal, verifiable salary (or who don’t have enough income to obtain a loan) but do have a lot of assets. The following are a few examples of individuals who might fall into this category:
Retirees
People who have retired are no longer collecting a paycheck, but they may still have a high net worth due to the total value of their assets. If you’re retired but have a part-time job, your wages from that alone may not be enough to qualify for traditional mortgages. However, with your assets added into the mix, you might be able to benefit from an asset-based loan.
Beneficiaries of an inheritance
People who inherit money from family or who have trust funds are often ideal candidates for an asset-based loan. If you have benefited from an inheritance, you may not work or otherwise have a sizable income because you don’t need a full-time job to support your lifestyle. If you don’t want to take a huge chunk out of your inheritance to purchase a house, an asset utilization mortgage could be an ideal solution for you.
Non-traditional earners
These days, there are many people who fall into the category of non-traditional workers. Freelancers, gig workers, business owners who don’t take a salary, and employees who work on commission (and thus don’t have a consistent monthly paycheck) are all potential candidates for asset utilization.
“This can be beneficial for someone with a lower income or whose debt-to-income ratio may otherwise lead to a loan denial,” adds Goforth.
Pro Tip
Some asset-utilization lenders may allow interest-only loan terms of 30 to 40 years, allowing you to lower your monthly mortgage payments so you can use the extra capital for investments and other financial goals.
Assets that qualify for asset utilization loans
The types of assets that a borrower can use to qualify for an asset utilization loan include bank accounts, certificates of deposit, investments, retirement accounts, and life insurance policies. You could use some or all of these types of assets as collateral, depending on how much you need to obtain a loan.
Bank accounts and CDs
Any bank accounts you own are considered assets and can be used to qualify for an asset-based loan, including savings accounts, checking accounts, and money market accounts. Included in this category are also certificates of deposit (CDs), which can often be purchased at banks or credit unions.
Investments
Certain investments are considered liquid assets and can therefore be used toward an asset utilization loan. These investments include products you would hold in an investment account, such as stocks, bonds, and mutual funds.
Retirement accounts
Your retirement accounts, such as 401(k)s and IRAs, may have hundreds of thousands (if not millions) of dollars in them that can be included in the income calculation for your mortgage application. However, if you are not actually retired or near retirement age, you may not be able to use a retirement account as part of your “income” to qualify for an asset-based loan.
Life insurance policies
If you have a whole life insurance policy with a significant cash value, some asset utilization lenders may let this count toward your income equivalent.
How to get approved for an asset-based loan
Loan qualifications may be more strict for an asset utilization mortgage than for conventional mortgages. Requirements for an asset utilization loan may include the following:
- A higher-than-normal down payment: You may need to put down 30% of the loan or more.
- A good credit score: Some lenders may not accept credit scores below 720.
- Verified assets: Typically, only a borrower’s liquid assets are considered toward a loan.
Keep in mind that lender requirements can vary widely and not all lenders offer asset-based loans, so you may need to research lenders who offer these loans and comparison-shop for the best interest rates as you would with any other loan.
Key Takeaways
- Asset utilization loans are special mortgages for which lenders calculate a borrower’s “income” based on the total value of the borrower’s assets.
- Asset-based loans are meant for borrowers who don’t have enough (or any) income from traditional sources but who do have sufficient assets to use as collateral.
- Most people who qualify for asset-based loans are high-net-worth borrowers with good to excellent credit scores who can afford a large down payment plus closing costs.
- Assets that qualify as collateral for asset utilization loans include checking accounts, savings accounts, money market accounts, stocks, mutual funds, retirement savings, and life insurance policies.
- Before approval, a lender will look at a borrower’s total landscape of assets and verify them by reviewing items such as bank statements and investment portfolios.
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