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Does the VA allow "asset depletion" mortgages?

Keith Gumbinger

An "asset depletion" mortgage isn't a mortgage per se, but rather a means of reckoning a potential income stream produced by your assets or investments for the purposes of qualifying you for a mortgage.

Generally, this option is most likely to be used by folks who have retired and are living off pensions, draws from 401ks or income streams from investments but who don't receive regular paychecks or have W2s against which income strength can be gauged.

In the case of VA-backed home loans, according to this VA document (which deals with income streams for mortgage qualification) the answer appears to be yes, but rather indirectly.

The following is taken from is VA Pamphlet 26-7, Revised Chapter 4, Credit Underwriting

Section 2 9 (Income), part r. (page 4-24) says:

r. Other Types of Income

If it is reasonable to conclude that other types of income will continue in the foreseeable future, include it in effective income. Otherwise, consider whether it is reasonable to use the income to offset obligations of 10 to 24 months duration.

“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.

The lender may include verified income from public assistance programs in effective income if evidence indicates it will probably continue for 3 years or more.

The lender may include verified workers’ compensation income that will continue in the foreseeable future, if the veteran chooses to reveal it.

The lender may include verified income received specifically for the care of any foster child(ren). Generally, foster care income is to be used only to balance the expenses of caring for the foster child(ren) against any increased residual income requirements.

Do not include temporary income items such as VA educational allowances and unemployment compensation in effective income.

Exception: If unemployment compensation is a regular part of the applicant’s income due to the nature of his or her employment (for example, seasonal work), it may be included.

Based on this, it appears that draws from a 401k would fall under "pension or other retirement benefits".

My guess is that you will need a highly skilled VA-loan underwriter or salesperson to talk to regarding this... but if nothing else, you have the document you can reference to help you on your way.

Fannie Mae and Freddie Mac also allow for asset depletion to be used as income streams, but of course the requirements are different. Some details about how this works can be seen in "How to buy a home in retirement".

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