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An Asset-Backed Mortgage Loan Is A Product
An asset-based loan is a product. As such, it has one main role: make a lender money. You knew that, right? It makes a lender money if you pay for it enough and there are not many loses.
For that reason, not all assets are treated the same.
100% of your cash is accepted all the time but only 60% or 70% of other assets that can be easily converted into cash.
If you have other kinds of assets, the kind that is not easily converted into cash, say a real estate property other than the subject property, you can use the equity in that one as collateral, but it would be under a different loan program.
Before explaining how it works and what to look out for, let’s cover the features of this type of loan.
Asset-Backed Loan Highlights:
- Borrowers are qualified based on the liquid assets they own.
- Maximum loan amounts vary but many lenders go up to $3 million
- Minimum credit scores are set by each lenders with some of them going as low as 600 while others not bothering with anybody whose middle credit score is less than 720. Yup, you need to shop around.
- Borrowers can qualify for a loan based on assets alone or a combination of assets plus income (any kind of regular income that can be proven to be stable).
- Borrowers who can qualify based on assets only don’t have to list any employment or any source of income they may have.
- Since income is not required, tax returns or transcripts are not required.
- Nor is Debt to Income (DTI) Ratio calculated.
- Terms very by lender, most available are 5/1 and 7/1 ARM’s but interest-only and other options are available.
- Most lenders require a hefty down payment (25& or 30%), though, at least at times, some will go as low as 10%.
- They can be used to purchase or refinance a single family house, a condo or 2-4 unit property.
- They can be used to purchase or refinance an owner-occupied, second home or investment property.
Asset-Based Lending For Residential Real Estate Types
There are two types of asset-based loans:
- Borrowers must prove they will use the asset to repay the mortgage. (They prove this by setting up a disbursement plan that covers the mortgage payment.)
- Borrowers do not have to prove they will use the asset to repay the mortgage. (Yup, they just have to show their asset is large enough).
How An Asset-Backed Loan Works
I think this part is best done with an example.
Bob shows up at a bank asking for a purchase loan for a summer house with a price of $1,650,000. He has documents that prove that he has liquid ($300,000 cash in bank accounts) and liquid-ish (stocks and such) currently worth $2,200,000. So, he’s got $2,500,000.
Based on the bank program’s guidelines, the loan officer determines that Bob must have 30% down payment. That means, Bob must borrow at most $1,155,000.
The bank Bob chose offers only 5/1 ARM’s.
Calculating Bob’s Asset-Based Loan Qualifying Amount
The $300,000 is all counted. The lender allows 70% of Bob’s other assets, so Bob has $2,200,000 x 70% + $300,000. In other words, Bob has $1,840,000 that can be used to qualify him for this mortgage loan.
To simplify my life, the Bank Bob chose has only one option: 5/1 ARM, amortized over 30 years with a cap of 7%.
To calculate Bob’s qualifying income on a monthly basis, we divide his qualifying income by the duration of the loan. So, $1,840,000/60=30,667.
Bob’s initial rate is low but the when it adjust it can go as high as 7%; so the bank is going to use 7% to figure out if Bob qualifies.
A mortgage of $1,155,000 at 7% amortized over 30 years, his monthly principal and interest is going to be $7,684.24. If his property taxes and property insurance are going to be, say, $2,370.12/month, Bob’s housing expenses are going to be $7,684.24+$2,370.12 or $10,054.36.
Does Bob Qualify For This Asset-Backed Loan?
Not only does Bob qualify, he qualifies with some $20,000 a month to spare.
What Are Bob’s Benefits For Going The Asset-Backed Loan Route?
Bob is not employed and he sold his company. All the income he has is from dividends, which are significant but not enough to cover his housing costs on the property he is buying and all his other debt servicing cost, so he would not have qualified under other programs.
Had Bob been buying a primary home, he would have qualified for a reverse mortgage, too, but it would have required a lot of research to find a lender doing reverse loans with such a high amount.
What Are Bob’s Risks for Going the Asset-Backed Loan Route?
None. Because in my scenario, the bank Bob chose does not require him to pledge his assets. So, if the value of his second home goes down, he will not have to provide more assets as collateral.
What Are Considered Assets For This Type Of Loan?
All easy-to-convert-into-cash are considered assets (checking accounts, savings accounts, certificates of deposit, money market accounts, mutual funds, stocks, and bonds, pensions. Investment accounts (stocks, bonds, and mutual funds). There’s one caveat: you cannot use the same assets as collateral on two loans.