VA Asset Depletion Loan

VA loans offer eligible borrowers an incredible, no-down mortgage option. But, not all veterans have “traditional” income sources to qualify (e.g. W-2 wages, pensions, self-employment, etc.). This leads many veterans to ask if they can qualify for a VA loan with their assets, not income. As such, we’ll use this article to answer the question: can you use a VA asset depletion loan?

Specifically, we’ll discuss the following:

• VA Loan Overview
• What is an Asset Depletion Loan?
• Does the VA Offer an Asset Depletion Loan?
• Final Thoughts

VA Loan Overview

Guaranteed by the Department of Veterans Affairs, the VA loan offers eligible borrowers these outstanding benefits:

• No down payment required
• No private mortgage insurance (PMI) required
• Low interest rates
• Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)

While the VA guarantees VA loans, individual lenders (e.g. banks, credit unions, and mortgage companies) issue and service the loans. With this situation, borrowers need to meet requirements imposed by both the VA and individual lenders. Accordingly, we’ll use this article to discuss asset depletion loans from the perspective of both of these parties.

What Is An Asset Depletion Loan?

Traditionally, borrowers qualify for a mortgage by showing that they have enough regular income to continue making monthly loan payments. For example, if you receive W-2 wages of $6,000/month, lenders can use that number to calculate how large of a loan to issue you.

But, some borrowers don’t have traditional employment or income sources. In particular, people in the following categories will likely struggle to qualify for a mortgage:

• Self-employed with little income
• Employed but with little income
• Retired

Lenders offer asset depletion mortgages for people who A) fall into one of the above categories, but B) also have significant liquid assets (e.g. savings, investments, and/or retirement funds). Instead of qualifying for a loan with traditional income sources, asset depletion mortgages let these people qualify based on their liquid assets.

Here’s how it works. Lenders add up all of your liquid assets and divide them by 360, the number of months in a 30-year mortgage. That amount translates into the monthly “income” you can use to pay your mortgage. Essentially, you draw a portion of your savings (i.e. deplete them) every month, with that amount covering your mortgage payments.

For example, say that a borrower has $2,000,000 in savings but wants to finance a home purchase with a mortgage – not buy the property outright. With an asset depletion mortgage, the lender would divide that savings by 360, translating to $5,556/month in “income.” If that amount meets the lender’s income and debt-to-income (DTI) ratio requirements for a mortgage, the borrower would qualify with his or her assets alone.

Does The VA Offer An Asset Depletion Loan?

Technically speaking, no, the VA does not offer an asset depletion loan. In other words, no VA asset depletion loan program exists. However, by understanding the VA’s income requirements, borrowers can explore different options for qualifying for a VA loan with assets – not traditional income.

VA Loan Income Requirements

To verify income towards loan qualification, the VA requires that these income sources must be: A) stable and reliable, B) anticipated to continue during the foreseeable future, and C) sufficient in amount. And, only verified income can be considered in total effective income.

In the VA’s underwriting guidelines, it describes two situations when borrowers may be able to apply assets towards their total effective income. That is, in these situations, the VA accepts verified income based on assets – not traditional income sources. As a result, if borrowers can qualify for a loan in one of the below scenarios, they effectively receive a VA asset depletion loan (even if the VA doesn’t call it that).

Scenario 1: Service Members Nearing Military Separation

To verify military income, lenders review your Leave and Earnings Statement (LES). This LES also includes your projected date of separation from the military. If your LES shows a separation date within 12 months, you may need to demonstrate significant liquid assets to qualify for a VA loan.

Borrowers with a separation date within 12 months can avoid this asset requirement if they meet one of these criteria:

• Documentation confirming your re-enlistment
• An accepted civilian job offer
• A signed letter from your CO stating re-enlistment eligibility plus a signed letter stating that you intend to re-enlist

If you don’t meet one of the above scenarios, the VA requires that lenders get “documentation of other unusually strong positive underwriting factors,” to include a 10% down payment and “significant” cash reserves. In essence, the VA acknowledges that these borrowers lack traditional income sources. As a result, VA guidelines allow lenders to accept a larger down payment and significant cash reserves in lieu of income. In effect, this means that borrowers qualify for an asset depletion version of the VA loan.

NOTE: While the VA doesn’t explicitly define what qualifies as significant cash reserves, most separating military members will not have this sort of cash on hand. However, if you received a major windfall (e.g. personal injury settlement, large inheritance, etc.) you may be able to use those assets to qualify for a VA loan.

Scenario 2: Borrowers Using “Other Types of Income” to Qualify for a VA Loan

In its underwriting guidance, the VA also explains when lenders can consider “other types of income” as verifiable income towards VA loan qualification. Specifically, this guidance states:

If it is reasonable to conclude that other types of income will continue in the foreseeable future, include it in effective income. [….] “Other” types of income which may be considered as effective income include, but are not limited to:

• Pension or other retirement benefits
• Disability income
• Dividends from stocks
• Interest from bonds, savings accounts, and so on, and
• Royalties

While not definitively stated, assets held in 401k, IRA, or TSP accounts should also qualify as “other retirement benefits” that can be considered verifiable income. For instance, assume that the borrower from the above example has $2,000,000 in his or her IRA and has already reached retirement age. Accordingly, the $5,556/month over a 30-year mortgage should qualify as verifiable income towards VA loan qualification. Once again, this would create a situation where a borrower effectively turns the VA loan into an asset depletion mortgage.

Individual Lender Considerations

Ultimately, individual lenders will decide whether or not liquid assets in the above two scenarios qualify as verifiable income towards VA loan qualification. This certainly isn’t guaranteed. Consequently, borrowers considering the above options will need to talk with lenders about their unique situations. Realistically, as both of the above represent very rare scenarios, it will take an extremely skilled and experienced VA loan underwriter to qualify you based on assets alone.

Final Thoughts

As stated, the VA does not technically offer an asset depletion loan. However, depending on your unique situation, you may qualify for a loan based solely on your available assets. In these situations, the VA loan effectively becomes an asset depletion mortgage.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.