Most people are familiar with regular, traditional mortgages and how they work. Self-employed borrowers may also be familiar with bank statement loan programs or, if they invest in rental properties, a DSCR (Debt Service Coverage Ratio) mortgage. A Total Asset Calculation loan is yet another type of mortgage that could be an ideal option for certain kinds of borrowers.
When qualifying borrowers for a loan, a mortgage company’s primary objective is to make sure the borrower has the ability to repay the loan. Because most people depend on their employment income to repay a mortgage, the W2 form that validates their earnings plays an important role during the qualification process.
That said, there are many people who can afford to pay the mortgage on a new home who are not employed. They may be retired. Some may have inherited money or have assets from a large divorce settlement. Ironically, they are often considered high-net-worth individuals and yet, without a W2, they are unable to qualify for a conventional mortgage.
That’s when a Total Asset Calculation loan from a Non-Agency mortgage company like Deephaven may be an ideal option.
Non-Agency mortgage providers serve millions of borrowers who, for one reason or another, are unable to qualify for a government-backed loan, even though they have the ability to repay the loan. There are a number of situations that may merit a Non-Agency loan, but in many cases, it’s because the borrower can’t produce the W2 form that the Agencies who back the loans — Fannie Mae and Freddie Mac — require to verify income.
Instead of relying on income from employment, the Total Asset Calculation program uses the borrower’s financial assets to qualify their ability to repay the loan. In simple terms, the lender adds up all of the borrower’s qualifying assets and then subtracts outstanding liabilities (debts) to establish a net asset value.
To be clear, the borrower is not necessarily expected to liquidate the assets to make monthly payments. The lender validates that there will be enough in investments and financial holdings to cover the loan should the borrower have cash flow issues down the road.
What kind of assets can be used for a Total Asset Calculation loan? Personally held stocks, bonds, vested amounts of IRAs, checking and savings accounts and Certificates of Deposit are the most common. If a couple is applying for the loan, both sets of personal wealth assets may be used to qualify.
For Deephaven’s Total Asset Calculation loan program, qualified assets must be sufficient to cover the new loan amount, down payment, closing costs, required reserves and 5 years of the borrower’s current monthly obligations.
Why, you may be asking yourself, wouldn’t a high-net-worth borrower just pay cash for the home and avoid a mortgage altogether? Good question! Wealthy individuals often use mortgages as part of an investment strategy. Many are ‘living off their investments’ which means they use interest and dividends generated by their assets to cover their monthly expenses and lifestyle. Liquidating assets to pay cash for a property could deplete their investment portfolio and negatively impact cash flow. Taking out a mortgage instead of paying cash may allow the borrower to continue to reinvest some of their investment income into their portfolios.
For purchasing a new home using a Total Asset Calculation loan, the borrower will need to gather up their latest investment and bank account statements as well as provide an itemized list of their debts and recurring monthly bills. They will also need a healthy FICO score. A loan officer or broker will submit the application to the mortgage company on behalf of the borrower. Once all required documentation is received, the loan will be processed and sent to the underwriters. Providing it meets the program requirements and gets approved, the mortgage company will then schedule the closing and you can start calling the movers.
