For borrowers who may not have enough traditional income to qualify for the mortgage, Freddie Mac provides an alternative path: converting eligible assets into monthly income using its asset depletion method. This calculated income can be added to other verified earnings and plays a direct role in establishing the debt payment and determining the debt payment-to-income ratio.
By using documented assets instead of relying solely on employment-based income, lenders can improve a borrower’s ability to qualify, especially in cases involving retirement savings or investment accounts. This article explains how the asset depletion calculation works, what documentation evidencing asset eligibility is required, and how tools like IncomeXpert support consistent, compliant implementation.
Main takeaways from this article:
- Freddie Mac allows borrowers to use liquid assets as a qualifying income source for a mortgage by depleting them over a specified period.
- Specific asset types are eligible (depository accounts and securities, retirement funds, trusts, and cash) and require thorough documentation to verify ownership and that they are not a loan or otherwise encumbered or double-counted with reserves.
- Calculating asset depletion income involves totaling net eligible assets and dividing by an amortization term to determine a monthly income figure that is combined with other verified income.
- Tools like IncomeXpert automate asset depletion calculations, flag errors, generate reports, and promote consistent underwriting in line with Freddie Mac guidelines.
Asset depletion as a basis for repayment of obligations
For some mortgage applicants, traditional income verification through pay stubs or tax returns may not fully reflect their capacity to repay a loan. Freddie Mac’s asset depletion policy allows these applicants to use their readily available liquid assets to help qualify for a mortgage. Instead of relying only on regular income streams, a portion of their assets is converted into a calculated monthly income figure, which is considered in the mortgage qualification process.
This asset-based income is subject to specific calculation formulas and eligibility criteria, designed to provide a conservative estimate that ensures repayment capacity without overestimating the borrower’s ability. The method also demands thorough documentation to verify asset ownership, liquidity, and the absence of borrowed funds.
This method is most helpful for individuals who are retired, self-employed with fluctuating income, or have savings and investments, including lump sum distribution funds.
Freddie Mac asset eligibility and documentation requirements
To use asset depletion for mortgage qualification under Freddie Mac guidelines, specific criteria must be met regarding the borrower and the types of assets presented.
Who qualifies?
Freddie Mac allows asset depletion income only for one or two-unit primary residences or second homes, with an LTV of 80 percent. In addition to meeting these property requirements, borrowers must demonstrate clear ownership and unrestricted access to the assets being used for depletion. The underwriter will evaluate the overall financial profile of these borrowers, including credit history and other relevant factors, in addition to the asset depletion calculation.
What types of assets are eligible?
Freddie Mac considers a variety of assets to calculate depletion income. These include:
Retirement Accounts
Retirement assets like 401(k)s or IRAs must meet several requirements to be eligible. The account must be IRS-recognized, fully vested, and solely owned by the borrower. Additionally, the borrower must have full access to the funds without penalties or early distribution taxes as of the note date, and the account must not be used currently as a source of income. In addition, cryptocurrency is explicitly excluded from retirement asset calculations.
Depository Accounts and Securities
This category includes checking, savings, money market accounts, and non-retirement securities like stocks, bonds, and mutual funds. The borrower(s) must solely own these assets or, if joint ownership exists, all owners must be borrowers or on the property title. At least one borrower must be 62 years or older, and funds must be fully accessible without penalty. Accounts must be held at U.S.-regulated financial institutions and verified in U.S. dollars. Large deposits exceeding 10% of total eligible assets require documentation to confirm their source and ensure they are not gifts or loans.
Lump-Sum Distribution Funds Not Deposited to an Eligible Retirement Asset
Lump-sum distribution funds must come from an IRS-recognized retirement account but deposited into a depository or non-retirement securities account. The borrower must have received these funds and have full, penalty-free access to them. Ownership of these funds cannot include parties not obligated on the mortgage, and the funds must not be subject to any early withdrawal penalties. Documentation, like employer distribution letters or IRS 1099-R forms, must verify these details.
Documentation requirements
Comprehensive documentation is crucial to validate the assets being used for depletion income. This documentation includes:
Account statements
Recent statements for all accounts being used for depletion are required. These statements should clearly show the borrower’s name, account numbers, balances, and the statement date. The statements should generally cover a period that allows for verification of the asset levels.
Ownership verification
Documentation establishing the borrower’s clear ownership of the assets is essential. For bank and investment accounts, the account statements typically suffice. Separate reserves from depletion funds
It is important to distinguish between assets designated as reserves and those used solely for depletion calculations. Reserves are assets held to cover potential future obligations, and Freddie Mac has specific requirements for the number of months of reserves a borrower must maintain.
No double-counting
Assets counted toward depletion must not be included in other qualification calculations, such as reserves or assets supporting other loan conditions. Proper documentation and account verification, i.e., VOD, help prevent double-counting, which could lead to non-compliance.
How to calculate Freddie Mac asset depletion income
To calculate asset depletion income that can be added to any other verified income the borrower may have, follow the steps below:
1. Start with eligible asset types
Begin by gathering all the verified assets that meet Freddie Mac’s eligibility criteria. Make sure that each asset is supported by recent and accurate documentation, including bank statements and direct account verification, where necessary.
2. Total up usable assets
Now, add the verified balances of all eligible assets to determine their total value. For retirement accounts, apply any necessary reductions for potential withdrawal penalties and taxes, as per Freddie Mac guidelines.
3. Identify the amortization period
Freddie Mac requires that eligible assets used for depletion be divided over a fixed 240-month (20-year) amortization period to calculate monthly income. This standardized term applies across most loan scenarios and ensures consistency in how asset-based income is derived. The lender must confirm that the full amount of assets used in the calculation is eligible and not allocated for other qualifying purposes, such as reserves.
4. Convert assets to monthly income
Once you’ve totaled the eligible assets and verified that they meet Freddie Mac’s documentation and usage guidelines, calculate monthly income using a 240-month amortization period.
Monthly Asset Depletion Income = Total Net Eligible Assets ÷ 240 months
For example, if a borrower has $240,000 in eligible liquid assets, the calculation would be:
$240,000 ÷ 240 = $1,000 per month in qualifying income
6. Cross-check for compliance
Ensure that the use of asset depletion income meets all other Freddie Mac requirements, including reserve requirements and documentation standards. The calculated income should be sufficient, in conjunction with other income, to meet the loan’s debt-to-income ratio guidelines.
7. Capture the analysis in the loan file
Thoroughly document the asset depletion calculation and the supporting data, including the asset statements and the amortization period used, in the loan file. This record demonstrates the basis for qualifying income derived from assets and ensures transparency during audits or reviews.
Common mistakes when using asset depletion income
Some errors can occur when utilizing asset depletion income for mortgage qualification, such as:
Double-counting assets for reserves and income
A common mistake is using the same assets for reserve requirements and income calculation. Freddie Mac requires that assets used for depletion income be distinct from those the borrower plans to retain as reserves post-closing, ensuring an accurate assessment of repayment capacity.
An incorrect term used for division
Another common error is using an incorrect amortization period (number of months) in the calculation. Always refer to the specific Freddie Mac guidelines or the lender’s instructions for the appropriate term for the loan product.
Using ineligible asset types
Including assets that do not meet eligibility criteria, such as assets with withdrawal restrictions or borrowed funds, can compromise the calculation’s validity. Proper verification and documentation help prevent this mistake.
Missing or incomplete verification
Failure to provide complete and accurate documentation for all assets used for depletion can cause issues. Ensure all account statements are current, clearly show ownership, and support the claimed asset values. Any inconsistencies or missing information will need to be addressed.
How IncomeXpert automates asset depletion calculations
IncomeXpert can automate and simplify the often complex process of calculating income from various sources, including asset depletion, ensuring adherence to Freddie Mac guidelines. Here’s how:
- Automates asset depletion calculations: IncomeXpert automatically aggregates verified asset data, applies the correct formulas, and calculates the monthly depletion income. This reduces manual calculation errors and ensures consistency across loan files.
- Generates audit-ready income reports: IncomeXpert produces comprehensive and audit-ready income reports that clearly detail the asset depletion calculation, the assets used, and the amortization period, facilitating compliance reviews.
- Minimizes manual data entry: By importing data directly from account statements and other sources, the tool reduces the need for manual input and lowers the chance of errors.
- Ensures consistent underwriting decisions: Standardized calculations and built-in compliance checks promote uniformity in underwriting decisions, minimizing subjective variations.
Confidently calculate asset-based income with IncomeXpert
Leveraging the right automation tools can dramatically improve the accuracy and efficiency of asset depletion calculations. IncomeXpert offers a comprehensive solution designed specifically for mortgage professionals to streamline the process, ensure compliance with Freddie Mac guidelines, and reduce manual errors.
By automating data aggregation, verification, and calculation steps, our tool provides confidence in your asset-based income assessments, enabling faster approvals and consistent underwriting decisions. Ready to see how IncomeXpert can transform your mortgage origination process?
Request a demo today and experience the benefits firsthand!