The taxman always gets his cut. Because that’s more than just a sentiment and it’s steeped in truth, wealthy individuals understandably do their best to keep their income and assets sheltered from being taxed. Often, it’s achieved by keeping their income level as low as possible to prevent paying higher than average income tax levels while storing their wealth in non-taxable assets and investments.
When it’s time to secure a mortgage, the practice of reducing taxable income is a problem. On paper, the lender can’t verify that the borrower has sufficient income to make the monthly mortgage payments, even if their bank accounts or investment portfolios are flush. It’s largely due to the calculations required by organizations like Fannie Mae and Freddie Mac for qualifying to finance.
An asset utilization mortgage from a lender with non-QM capabilities like MBANC can be the answer. How does the process work, and how is it different than a traditional mortgage?
How asset utilization mortgages work
The basis of any mortgage application is a lender’s ability to verify that a loan will be repaid. By reducing their taxable income amounts, a lender would only qualify for a smaller mortgage amount than they can actually afford based solely on traditional mortgage qualifiers. An asset utilization mortgage essentially projects additional, theoretical income.
An applicant who has significant asset amounts usually has their money put to work, earning additional income for them. It’s a safe assumption that their assets would earn a return of 4%, 5%, or even much higher annually. A lender who offers asset utilization mortgage programs looks at a conservative return percentage on assets as an additional income stream. By adding the theoretical interest earned to the applicant’s actual taxable income on paper, they can qualify for a much higher mortgage amount than is otherwise possible.
Let’s look at a scenario to see how it plays out in real life.
Jane is a founder and CEO of an extremely successful tech startup. Her equity in the company as well as her 401(k) and other investments puts her in a very healthy financial position, adding up to $3 million in assets. When she files her taxes, the income Jane draws from the company is minimal, just $150,000 per year, which is sufficient to cover her current expenses.
However, Jane’s family is growing and they need more space. The home she wants to buy is $1.5 million. Her home equity is enough to cover her 20% down payment and closing costs, but the remaining $1.2 million requires a monthly PITI payment of more than $7,000 per month. Her current income would only allow mortgage payments up to $5,625 at a 45% DTI ratio if that’s the only commitment she has, meaning there’s no possibility to qualify in a traditional sense.
With an asset utilization mortgage application, the lender views Jane’s assets as another revenue stream. At 4%, her $3 million in assets can generate another $120,000 in theoretical income. So, with a potential $270,000 in income, Jane can now qualify for PITI payments as high as $10,125 per month, making her new home a reality instead of a dream. That payment still fits within her monthly income, so she may not have to draw any extra money from her business either.
What to expect from an asset utilization mortgage
Because it’s a non-QM mortgage that presents a slightly higher risk to the lender, mortgage rates tend to be a couple of percent higher than posted rates, generally. The higher rate is not intended to be punitive but represents a niche product that serves a borrower’s needs where other options won’t.
Applicants who qualify can expect a substantial bump in the mortgage value they can receive compared to a traditional product, letting them get on with the lives they’ve earned without being penalized by the taxman first.
Want to know more about our options for asset utilization mortgages? Ask an MBANC analyst how we can serve you today.