Freddie Mac’s New Asset Depletion Formula

Unknown Speaker

Hi Everyone! Welcome to another episode of the Reliant Mortgage Solutions Podcast. Today we are going to talk about a small guideline change that could have a big effect on qualification. Picture a 40 year old successful business owner or real estate investor sitting on five hundred thousand dollars in liquid stock accounts, but because they do not take a standard W two salary, they're used to getting turned down flat for a conventional mortgage. All because they were not retired yet.

James Eveld

Wait, so even if they had half a million dollars sitting in cash or blue chip stocks after paying their down payment, the old guidelines literally would not let us count those assets as monthly income unless they hit a specific age threshold?

Unknown Speaker

Exactly. You had to meet a formal retirement age requirement just to use eligible bank or security accounts as income for conventional qualification. But Freddie Mac just officially scrapped that age restriction entirely for eligible depository accounts and securities. And that is not even the only huge shift. They also changed the math formula itself.

James Eveld

From an economics standpoint, that old rule was so archaic. It completely ignored how modern wealth is created, especially for younger business owners or investors whose balance sheet strength is in equity and liquid reserves rather than a consistent biweekly paycheck. So what is the new math formula?

Unknown Speaker

So under the old rule, Freddie Mac took your net eligible assets and divided them by two hundred and forty months. That is twenty years. Now, they divide by one hundred and eighty months, which is fifteen years. So let us run the actual numbers because the math makes a massive difference for qualifying income.

James Eveld

Okay, let us trace a real scenario. Say a borrower has eight hundred thousand dollars in an investment account. They put three hundred thousand down for purchase and closing costs. That leaves five hundred thousand dollars in remaining eligible assets after the deal closes.

Unknown Speaker

Right. It is always based on what remains after the transaction, not the starting balance. So take that five hundred thousand remaining dollars. Under the old two hundred and forty month calculation, five hundred thousand divided by two hundred forty gave you two thousand eighty three dollars a month in qualifying income.

James Eveld

And under the new one hundred and eighty month factor?

Unknown Speaker

Five hundred thousand divided by one hundred eighty gives you two thousand seven hundred and seventy eight dollars per month. That is almost seven hundred dollars more per month in qualifying income. Six hundred and ninety five dollars more every single month, out of thin air, from the exact same five hundred thousand dollar asset pool.

James Eveld

That six hundred and ninety five dollar bump can easily make or break a debt to income ratio on a high balance loan. But I know my underwriters, Sean. This is definitely not a walk in the park no documentation loan, right?

Unknown Speaker

Oh, absolutely not, but the documentation standards are fairly straight forward. First, you need an Accept automated underwriting recommendation, and Freddie Mac sets a hard floor of at least thirty thousand dollars in net eligible assets remaining. But the paper trail is where people get caught if they are not careful.

James Eveld

Right, because you need a full twelve month history on those accounts unless the funds came from another fully documented eligible source, like selling a property or selling a business. And underwriters are going to scrutinize balance swings, correct?

Unknown Speaker

They sure do. If your account balance dropped by more than twenty percent over the past twelve months, you have to prove those funds were transferred into another qualifying account. And if the balance spiked by more than twenty percent, you cannot just count that extra cash unless you trace it to an acceptable source like a retirement distribution or documented asset sale. Having the assets is only half the battle. Documenting the paper trail is what actually closes the loan.

James Eveld

That makes total sense. You cannot just have a friend wire two hundred grand into your checking account last week and call it qualifying asset depletion.

James Eveld

So Sean, conventional financing with Freddie Mac now gives us this one hundred and eighty month divisor. But in our toolkit, we also have Non QM asset depletion options, which can be even more aggressive on the math, right?

Unknown Speaker

Way more aggressive. Many Non QM programs use a sixty month division factor instead of one hundred and eighty months. Five years instead of fifteen.

James Eveld

Wait, sixty months? Let us do that same five hundred thousand dollar example with a sixty month factor.

Unknown Speaker

Five hundred thousand dollars divided by sixty months generates approximately eight thousand three hundred and thirty three dollars per month in qualifying income. Compare eight thousand three hundred thirty three per month in Non QM to two thousand seven hundred seventy eight per month with Freddie Mac.

James Eveld

That is a massive leap, over five thousand dollars a month more in income. But what is the trade off? Because Non QM is not always the right answer for every buyer.

Unknown Speaker

The trade off is rate and down payment. Non QM programs typically demand higher interest rates and larger down payments, but here is the secret weapon with Freddie Mac making this change. Conventional financing allows lower down payments, even under twenty percent down with mortgage insurance.

James Eveld

Ah, that is huge. Non QM generally will not touch borrowers putting down less than twenty percent. So if someone wants to preserve their liquidity and put down ten or fifteen percent, Non QM was out, and old conventional rules rejected them if they were under retirement age.

Unknown Speaker

Spot on. In my twenty plus years doing this, the biggest mistake I see borrowers make is forcing themselves into a box because they only looked at one loan product. Now, if someone has strong asset reserves but lower tax return income, we can run conventional side by side against Non QM.

James Eveld

We weigh the interest rate cost against the required down payment and cash out of pocket, and find the exact sweet spot that protects their liquid capital while giving them the lowest possible monthly payment.

Unknown Speaker

Exactly. It gives us another powerful tool to help high net worth clients get the house they want without jumping through unnecessary hoops.

James Eveld

Awesome stuff. Well, if you have significant liquid assets and want to see how these math models stack up for your purchase, reach out and let us run the numbers.

Unknown Speaker

Thats all for this episode folks! Thanks for listening, and join us next time on another episode of the Reliant Mortgage Solutions Podcast.

Unknown Speaker

Take care!