To calculate asset depletion income, take the qualifying balances in your cash, investment, and retirement accounts, subtract your down payment, closing costs, required post-closing reserves, any liens against those accounts, and any early-withdrawal penalties, then divide what remains by the number of months your loan program uses as a divisor. The result is a monthly figure the lender adds to any other income when running your debt-to-income ratio. This is the method retirees, self-employed borrowers, and anyone whose wealth sits in savings and investments rather than a paycheck use to qualify for a mortgage.
The money is not actually spent. The lender simply treats a portion of your balances as if it produced steady monthly income, and federal rules permit that approach: creditors may base a repayment-ability determination on assets other than the home being purchased, including savings, checking, vested retirement funds, stocks, bonds, and CDs.1Consumer Financial Protection Bureau. 12 CFR 1026.43 Minimum Standards for Transactions Secured by a Dwelling
The Three-Step Formula
Step 1: Find Your Net Eligible Assets
Start with the current value of every qualifying account. From that total, subtract:
- Your down payment and estimated closing costs
- Required post-closing reserves
- Outstanding liens against the accounts, such as a 401(k) loan or margin balance
- Early-withdrawal penalties that would apply if retirement accounts were fully distributed today
Fannie Mae specifies that this figure excludes funds used for down payment, closing costs, and required reserves, so the same dollar cannot serve as both depletion income and reserve cushion.2Fannie Mae. B3-3.1-09, Other Sources of Income
Step 2: Apply the Discount
Not every dollar in every account counts at face value. Cash in a bank account is generally credited at 100 percent. Retirement accounts are commonly discounted to roughly 70 percent of market value to reflect deferred taxes and potential penalties. Some non-QM lenders discount retirement funds by as much as 50 percent for borrowers under 59½ and allow full value for older borrowers who face no early-withdrawal penalty. A $400,000 IRA under a 30 percent discount contributes about $280,000 to net eligible assets.
Step 3: Divide by the Program’s Month Count
Divide your net eligible assets by the divisor your loan program uses. This is where the same balance produces very different monthly incomes depending on who is underwriting.
The Divisor Depends on the Loan Program
Take a borrower with $500,000 in net eligible assets and watch the monthly figure change:
Fannie Mae
Fannie Mae divides by the remaining mortgage term in months. A 30-year loan uses 360; a 15-year loan uses 180. At 360 months, $500,000 becomes about $1,389 per month in qualifying income.
Freddie Mac
Freddie Mac uses a flat 240-month divisor regardless of the loan term. The same $500,000 produces about $2,083 per month, roughly 50 percent more than the Fannie Mae figure on a 30-year loan.3Freddie Mac. Guide Section 5307.1 – Assets as a Basis for Repayment of Obligations Freddie Mac layers on age rules: for depository accounts and non-retirement securities, at least one borrower must be 62 or older; for retirement accounts, you must have penalty-free access to the entire balance.
Non-QM Lenders
Non-qualified mortgage lenders set their own divisors, typically 60, 84, or 120 months. A 60-month divisor turns the same $500,000 into $8,333 per month. Non-QM rates generally run half a point to two points above conventional rates, reflecting the risk the lender takes on with non-traditional income verification.
Which Assets Count
Lenders limit eligible assets to holdings that are readily accessible:
- Savings, checking, and certificates of deposit at regulated institutions, counted at full face value
- Publicly traded stocks, bonds, and mutual funds in brokerage accounts where you have unrestricted access; Fannie Mae accepts vested stocks, government bonds, and mutual funds when their value can be verified4Fannie Mae. B3-4.3-01, Stocks, Stock Options, Bonds, and Mutual Funds
- IRAs and 401(k) plans, subject to the discounts above
Assets not readily convertible to cash are excluded: your primary residence, investment real estate, ownership interests in private companies, and personal property. The time and uncertainty involved in selling them makes them unsuitable for monthly income modeling.
Retirement Accounts Deserve a Closer Look
The money in an IRA or 401(k) is not fully accessible without consequences, which is why most lenders trim about 30 percent off before counting it. Freddie Mac takes a different route: rather than a blanket percentage, it requires penalty-free access to the funds. If you are below the age threshold, those accounts may not qualify at all under Freddie Mac’s program.3Freddie Mac. Guide Section 5307.1 – Assets as a Basis for Repayment of Obligations
A retirement account that already produces monthly income you’re counting elsewhere, such as required minimum distributions or a pension stream, cannot also be run through the asset depletion formula. The same funds cannot be counted twice.
Business Sale Proceeds
Freddie Mac permits proceeds from a recent business sale to feed the calculation if you are the sole owner of the deposited funds, the proceeds are immediately accessible in full, and the sale left no retained business assets or seller-held notes. Expect to produce the executed closing documents, the sales contract, and the most recent business tax return filed before the sale.5Freddie Mac. Guide Section 5307.1 – Assets as a Basis for Repayment of Obligations
Documentation the Lender Will Ask For
Fannie Mae requires the most recent two full months of account statements for a purchase and one full month for a refinance. If the latest statement is more than 45 days old at application, the lender will ask for a supplemental bank-generated document showing at least the last four digits of the account number, the current balance, and the date.6Fannie Mae. Verification of Deposits and Assets
Every statement should show the institution’s name, all account holders, and the full account number. Brokerage and retirement statements need to reflect current market values. Disclose any liens or encumbrances—a 401(k) loan, a margin balance—so the lender can back those amounts out of your gross balance. For a Freddie Mac business-sale case, add the executed sale closing documents, the purchase contract, the most recent pre-sale business tax return, and three months of depository or securities account statements.5Freddie Mac. Guide Section 5307.1 – Assets as a Basis for Repayment of Obligations
Limits That Shape the Result
A few program constraints will affect how the arithmetic plays out in your file.
Freddie Mac caps the loan-to-value ratio at 80 percent for mortgages that rely on assets as the basis for repayment, meaning at least a 20 percent down payment.3Freddie Mac. Guide Section 5307.1 – Assets as a Basis for Repayment of Obligations Non-QM lenders may allow higher LTVs but usually charge for the privilege.
Required reserves must sit apart from the balances feeding the depletion formula. Under Fannie Mae’s approach, reserves come off the top before the monthly figure is calculated.2Fannie Mae. B3-3.1-09, Other Sources of Income
Whatever the divisor, the lender still has to satisfy the federal ability-to-repay rule, which requires a reasonable, good-faith determination that you can repay based on verified income or assets and current debts.1Consumer Financial Protection Bureau. 12 CFR 1026.43 Minimum Standards for Transactions Secured by a Dwelling That rule is the legal basis for asset depletion in the first place, and it’s the reason the monthly figure you calculate has to hold up under documented scrutiny rather than estimation.