Stating Income With Assets
As we've discussed in previous posts, stated income mortgages are a bit different than the once were. The risky "liar loans" of the pasts are no longer available - and with good reason. The lack of income verification and the practices of less-than-honest lenders contributed directly to the market collapse...
Fortunately, the regulations put in place in the wake of the 2008 financial crisis serve to protect both borrowers and lenders, reducing overall risk, and making sure that individuals can afford to pay back the loans they take out - including loans with "stated income" (thought that doesn't quite mean the same thing it used to). Now, securing a home loan can unfold in a wide variety of ways. Depending on the nature of a borrower's income, different types of loans are better suited for different situations. For those with nontraditional income, like freelancers, self-employed people, entrepreneurs, investors, etc., standard mortgages are often less than ideal. That's where variations of the stated income mortgage come in to play. With certain types of stated income loans, calculations for the borrower's ability to repay are done by way of assets. This is particularly useful for people whose money is largely tied up in other properties, but the assets evaluated are not exclusively real estate.
Assessing income based on assets typically works in one of two ways: Asset Qualification
With this approach, a lender will add all of your assets and determine a total value. Then, they subtract the loan amount from this total. Next, they'll tally all of your monthly liabilities (debts, insurance, car payments, etc.), and multiply the total by a certain number of months. This can vary by lender, but they are looking for a total liability value over a long period of time, say 60 months. If the the balance of your assets, minus the amount of the loan, still exceeds your liabilities for the period of time calculated, this shows your general "income" and may allow you to qualify for the loan! Asset Depletion
This approach is a bit simpler, and favors those with high asset wealth, but perhaps not much in cash liquidity. With this method of income calculation, a lender simply tallies all assets, then divides the total by the terms of the loan - typically 360 months. The resulting figure shows your general monthly "income" from assets. It should be noted that not all assets will be treated the same. A property may be evaluated at 100% of its value, where a retirement account (if you're under retirement age) may only be evaluated at 75%.
The exact calculations can vary. Your lender may offer a shorter term loan, which will change the number of months used to divide, or include other assets/income like Social Security, dividends, etc. As always, each lender is going to be a little bit different, and every borrower's situation is a bit different. These asset-based methods of evaluating income may be perfect for some borrowers, but not for others. If you are "asset rich" but "income poor," it's a good idea to explore these options to see how your assets stack up against your proposed loan amount.