Having Your OREO and Depleting It Too
Asset-backed or asset qualifying mortgages are not endangered species around here. Not a week goes by where we don't field an inquiry from a home buyer or homeowner seeking a mortgage but devoid of the typical income qualifying requirements; paystubs, W-2 forms and tax returns that show what they really earn in any year. So using assets to qualify for a mortgage has become a viable alternative for those who have strong credit and who have demonstrated the ability to save and invest. These individuals can often parlay their (liquid) net worth into qualifying power, and maybe the best part is that they do not need to sell or otherwise touch those assets. Asset depletion, asset utilization, asset amortization or asset-backed loans --- whatever you want to call them --- are, indisputably, no longer mortgages relegated to the high-rate outer fringe of the lending industry.
But up until this time, one of the major hindrances to qualifying for an asset-backed loan is that we have not permitted borrowers to use the equity in other real estate owned (OREO) as a way to qualify. Yes, we count cash-equivalents, stocks, bonds, mutual and exchange-traded funds and even retirement accounts in some cases. But equity in other real estate? It was a non-starter. You could literally have millions of dollars worth of property in your portfolio but we would not consider it, except on the liability side of the equation. That's changed with our new asset qualifying program and here are the key things to know.
Utilization of financial assets will be considered as borrower income to help qualify for their monthly payments. The assets themselves do not need to be liquidated, moved, pledged or otherwise. We can also use asset depletion to supplement other sources of income, including employment-based income, Social Security and the like. The key thing to know with this program is that after the down payment and closing costs have been made (in the case of a purchase) the borrower must have $450,000 in 'net' assets, and this is further governed by the requirement to have the lesser of $1MM or 1.25 times the loan amount in 'qualified assets.' Let's examine each category and then give an example of a purchase scenario.
On our asset-backed mortgage here, your "net assets" are those that remain in your accounts after you've closed the transaction. Further, whatever that number will be, we'll apply a qualifying percentage to those balances. Non-retirement investments are counted at 85% of their total value, retirement accounts at 80% and other real estate owned (OREO) at 75% of its equity position, determined by an exterior appraisal or broker price opinion (BPO). Remember, post-close, we need to have no less than $450K remaining via all sources.
In order to drive asset-based income, we use our net asset total above, but must assure that it first meets or exceeds 125% of the loan amount or $1MM, total, whichever is less. We will then take the net asset total and apply a utilization draw schedule of 120 months. The resulting figure can be used to create or supplement qualifying income.
Let's use the test case below to demonstrate the power of this program:
- Purchase price: $500,000
- Down payment: $100,000
- Loan amount: $400,000
- Estimated closing costs: $10,000
- $25,000 in checking/savings (utilized at 100% for a total of $25,000)
- $100,000 in a money market fund (utilized at 100% for a total of $100,000)
- $120,000 in stocks/bonds/mutual funds (utilized at 85% for a total of $102,000)
- $200,000 in retirement accounts (utilized at 80% for a total of $160,000)
- $600,000 in equity in OREO (utilized at 75% for a total of $450,000)
Net assets: $837,000 (qualifying assets) - $110,000 (transaction requirements) = $727,000
In this case, $727K is greater than 1.25 times the loan amount ($500,000) and greater than $450K in post close, so we can deplete the amount. If we divide $727K by 120 months, we derive $6058 in monthly qualifying income. This can be added to any other income the borrower documents, or it can be used on its own, if sufficient to make debt-to-income ratio requirements.
Icing on the Cake
Asset-utilization mortgages have been in existence for a bit of time now and are gaining popularity each month. But our use of OREO is unique and a force multiplier for these types of qualifications. If you own real estate that has a lot of equity in it, and you need an alternative qualification method, perhaps because you're self-employed or have variable income, give us a call and let's review your profile in this new light. The results might be sweet.
Oh, oh, oreo,
Robert J. Spinosa
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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