by Amresh Singh
14 min read
Asset-based mortgages are becoming increasingly popular among borrowers as an alternative to traditional financing options, mainly when access to other forms of credit may be limited or restricted.
Asset-based mortgages use liquid assets such as mutual funds, money market accounts, retirement assets, and savings accounts as collateral for the loan.
Here we’ll explore asset-based mortgages and how they work, including asset-based loans, asset depletion loans, asset-based lending, asset-based mortgage lenders, and income requirements. Read on for more information on asset-based mortgages and how to make sure they are right for you.
Definition of Asset-Based Mortgages
An asset-based mortgage is a mortgage that uses one or more assets as collateral against the debt. The assets used as collateral can be anything from real estate to stocks, bonds, and other investments.
These mortgages are generally less risky than traditional ones because they assure the lender that they will be repaid in full even if the borrower defaults on their mortgage payments once.
How does Asset-Based Mortgage work?
Asset-based mortgage lenders review borrowers’ total net worth, including their bank accounts, physical assets, and other investments. They also look at the borrower’s monthly income and banking history to assess whether they have enough liquid assets to repay the loan.
In addition to assessing the borrower’s financial and asset situation, mortgage lenders will also consider their creditworthiness. Generally, borrowers with good credit scores and banking history can get asset-based mortgage loans at competitive interest rates.
When applying for an asset-based mortgage loan, borrowers need to provide the lender with documentation, including tax returns and proof of the value of their assets. The lender will then determine the total value of the asset-based financing loan and the closing costs.
How to Calculate Asset-Based Mortgage?
Here is the step-by-step process to calculate an asset-based mortgage:
- Determine your total assets: The first step is to take stock of all your purchases. It includes all physical property you own, including cars, artwork, jewelry, etc., and all liquid assets, such as stocks, bonds, and savings accounts.
- Determine the value of your assets: Once you determine your total assets, calculate the value of those assets. For example, you can use appraisals to determine a fair market value for physical assets such as cars and artwork. Likewise, you can use the current market value for liquid assets such as stocks and bonds.
- Apply a loan-to-value ratio (LTV): An LTV ratio represents the percentage of your total assets you can use as collateral against a loan. Generally, asset-based loans have LTV ratios between 50-70%. For example, if you have $500,000 in assets and a loan-to-value ratio of 60%, you can borrow up to $300,000.
- Calculate the loan amount: Multiply the total value of your assets by the LTV ratio to determine the maximum amount you can borrow. Using the above example, where you have $500,000 in assets and a 60% LTV ratio, your maximum loan amount would be $300,000.
- Consider other factors: Asset-based mortgages typically have higher interest rates than traditional ones.
- Reach out to a lender: Once you’ve completed the above steps, you can contact a lender to begin the mortgage application process.
That’s it! These are the six steps to calculate an asset-based mortgage.
What are Asset-based mortgage rates?
Asset-based mortgage rates will typically depend on the type of asset used as collateral, the loan amount, and the borrower’s credit score.
Generally, mortgage-based loans may have an LTV of up to 90%, while other assets like bank or retirement accounts may have a lower LTV ratio. Rates can range from 3% to 15%, depending on the lender’s loan terms and asset type.
Overview of Asset-Based Mortgage Lenders
Asset-based mortgage lenders are becoming increasingly popular among borrowers, offering asset-based loan programs that provide competitive rates and flexible terms.
- According to a recent survey, asset-based loans account for over 30% of all mortgages in the United States.
- Asset-based mortgage lenders create an asset-based loan program to meet the needs of each borrower.
For example, asset-based loans are often available for borrowers with limited liquid assets, such as savings or retirement accounts. These programs may also require a certain level of cash flow and taxable income to qualify for the loan approval process.
Benefits and Drawbacks to Asset-Based Loans
The asset-based loan program offered by asset-based mortgage lenders offers several benefits compared to conventional loans.
For example, asset-based loans tend to have lower interest rates and more flexible terms than traditional ones. They also offer the added security of being backed by asset collateral.
However, asset-based mortgages may be riskier for lenders as borrowers use fixed assets that could decrease in value over time. So let us have a look at all of them.
Benefits of an Asset-Based Loan
- Asset-based loans provide access to capital without giving up equity.
- The loan is secured against the asset’s value, reducing the risk for lenders.
- Asset-based loans have flexibility in terms and conditions, with repayment periods that aim to suit individual circumstances.
- Access to short-term funds with less paperwork and no need for collateral.
- Quick turnaround times allow businesses to take advantage of opportunities quickly.
Drawbacks of an Asset-Based Loan
- The first drawback is higher interest rates due to the risk associated with unsecured loans.
- The loan amount depends on the asset’s value used as collateral, meaning it could be lower than expected.
- Complex documentation requirements can lead to delays in receiving funds or increased costs.
- Assets used as collateral may become illiquid if they sell quickly enough when repayment commitments are incomplete.
At HomeAbroad, we understand how critical it is to find the right lender quickly. As such, let us help you search for a perfect match!
Example of Asset-Backed Loan
An Asset-Backed Loan (ABL) is a loan where the borrower uses one of their assets as collateral. To illustrate how people are using ABLs in real life, consider this example:
- John needs to acquire a new batch of construction equipment to fulfill orders from his clients but needs more funds.
- He has an entire warehouse full of materials he owns outright, so he turns to Asset Based Lending to procure the necessary resources for purchase.
- John requested a loan from a financial institution specializing in small business loans.
- The lender assessed his credit record, organization operations, and the cost of the equipment he had stored away in his warehouse before offering him $100,000 secured by some pieces of the inventory inside said storage facility.
- After John accepts the loan offer, a lien is put on his equipment to secure the loan. With this money, he purchases new apparatus that John can lease to customers.
- As those same clients pay for leasing it, John utilizes these funds to reimburse the asset-based lender.
By using an ABL, John can boost the value of his current assets to acquire financing for his business. But it is essential to understand the benefits and drawbacks of these mortgage products before selecting a lender.
HomeAbroad offers asset-based mortgage lenders so you can find an option that works for you. We also provide expert advice to ensure you make the right decision when choosing a lender. Get in contact today to find out more.
How Does an Asset-Based Mortgage be different from a Traditional Mortgage?
An asset-based mortgage is different from a traditional mortgage in several ways.
- The most notable difference is that an asset-based mortgage does not require a down payment and does not rely on the borrower’s monthly income for loan approval.
- Instead, it relies on the value of the assets used as collateral to provide security for the loan.
In addition, asset-based mortgage lenders may consider a broader range of assets than traditional ones. For example, it can include physical assets such as cars or jewelry, marketable securities such as stocks and bonds, or government bonds.
Finally, an asset-based mortgage requires a different level of income verification than a traditional mortgage loan. As a result, it makes it easier for borrowers who do not have a convenient source of income to qualify for the loan.
Types of Assets to use for collateral for an Asset-Based Mortgage
When considering asset-based mortgages, it is essential to understand the types of assets that you can use as collateral. Asset-based loans use liquid assets as collateral against the debt, such as:
- A retirement account
- Cash equivalents (stocks and bonds)
- Real estate investments
- Business equipment or vehicles
- Other substantial assets.
Asset-based mortgage loans, such as asset depletion loans, consider a combination of liquid asset value and existing debt obligations when determining qualification for the loan approval process.
This loan type calculates the ratio between an applicant’s available assets and total debt load to determine mortgage eligibility. In detail, let us look at the kinds of support to use as collateral for asset-based mortgages.
Cash Flow and Liquid Assets
Cash flow and liquid assets are critical components of financial planning and management. Cash flow is the money that comes into a business from its operations, investments, or sales. Liquid assets are resources such as cash, stocks, and bonds that you can easily convert into cash quickly.
Different types of liquid assets include:
- Current accounts.
- Savings accounts.
- Money market accounts.
- Foreign currency accounts.
- A retirement account.
- Certificates of deposit (CDs).
- Treasury bills (T-bills).
- Mutual funds.
- Exchange-traded funds (ETFs).
These different liquid assets can give businesses various advantages for managing their finances effectively. Let us now explore Liquid assets in further detail.
Mutual funds are a popular asset class you can use as collateral for asset-based mortgages. Mutual funds involve pooling money from multiple investors to purchase stocks, bonds, or other assets. It diversifies the investor’s portfolio and spreads risk in various asset classes.
- According to the Investment Company Institute, there are many mutual funds in the United States alone as of March 2023, with a total asset value of over $8.64 billion.
Mutual funds can provide investors access to professionally managed portfolios and asset classes that may not be available through individual investing or other asset-based mortgages.
Furthermore, mutual fund investments generally require lower minimums when compared to other asset-based loan options.
Money Market Accounts
As we know, money market accounts are savings accounts that provide cash liquidity and higher interest rates than conventional savings accounts.
Money market accounts have a relatively low minimum balance to open and maintain performance, making them a popular choice for asset-based mortgages.
Also Read: A Complete Guide To Self-Employment Mortgage
Retirement assets such as 401(k)s, individual retirement accounts (IRAs), and cash-value life insurance are ones you can use as collateral to secure an asset-based mortgage.
Retirement assets can provide a stable cash flow and likely have a lower risk profile than other asset-based mortgage options. As a result, it makes them an attractive option for borrowers seeking an asset-based loan.
Savings accounts are cash equivalents of assets you can use as collateral for an asset-based mortgage.
According to the Federal Reserve, cash in savings accounts totaled over $2.3 Trillion in 2020 — making it one of the most widely held cash assets in the US Savings accounts provide liquidity and a relatively low-risk option when used as collateral for a mortgage.
Furthermore, savings accounts generally have a low minimum balance requirement to open and maintain the performance, making them an attractive option for borrowers looking to secure an asset-based mortgage.
Other Asset-Based Loan Options
In addition to traditional loans made to cash assets, other asset-based loan options can use as collateral for a mortgage. For example, equity assets such as real estate and cars can provide collateral for an asset-based mortgage.
Sometimes, lenders may also accept other investments like gold, silver, and cryptocurrency. Furthermore, personal loans and personal lines of credit can gain by lenders for asset-based mortgages.
When considering an asset-based loan, borrowers should consider the risks and rewards associated with each asset type to identify the best option for their financial needs. We will now see some other asset-based loan options.
Equity assets such as stocks, bonds, and real estate are cash-generating assets and can be used to securitize an asset-based mortgage.
An equity asset generally provides more cash flow than other assets but comes with greater risk depending on the specific asset type.
Asset Depletion Loan
An asset depletion loan is an alternative mortgage option that allows borrowers to convert their liquid assets into cash and use them as collateral for the loan. This asset-based loan can benefit borrowers with significant money in the bank or other investment accounts but limited fixed assets such as real estate.
You can use cash to pay off the loan at a predetermined rate over a fixed period derived from the cash flow generated from net assets.
Furthermore, borrowers can benefit from a lower loan interest rate due to their liquid assets. However, this type of asset-based loan is typically more challenging to qualify for and may require additional cash reserves.
Overall, asset depletion loans can provide an attractive option for borrowers with fewer fixed assets but significant cash resources.
Asset-Based Lending (ABL)
Asset-based lending is financing that uses tangible assets such as cash, inventory, real estate, and equipment as collateral. ABL is a flexible form of funding that can provide cash flow to support businesses regardless of their credit rating or cash flow cycle.
ABL can be an attractive option for businesses looking to access capital quickly or who need help to secure traditional financing due to their credit rating or cash flow cycle.
Additionally, asset-based loans can provide businesses with more favorable loan terms than traditional ones and can be used to finance projects or cover cash flow gaps.
How do Lenders Verify your Assets?
When applying for an asset-based mortgage, lenders will check your financial information to verify the liquid assets you can use as collateral. They may also look at other factors like your banking history, tax returns, credit score, and overall net worth.
- For example, Fannie Mae’s guidelines may require additional financial information to verify your income and assets if you want a home loan.
In most cases, lenders must verify that you have enough assets to meet the loan amount, mortgage payments, and closing costs.
The total value of your assets must equal or exceed the loan amount for you to qualify for an asset-based mortgage. Finally, some lenders may require additional financial information depending on the type of mortgage you are applying for.
Factors to Consider When Choosing an Asset-Based Mortgage
When considering an asset-based mortgage, borrowers should take into account several factors.
Additionally, borrowers should consult with a mortgage broker or financial advisor to ensure they are making an informed decision about which type of asset-based mortgage is best for their needs.
It’s important to understand that asset-based mortgage loans may come with different interest rates, loan terms, and down payments depending on the type of asset used as collateral. Now, let’s explore those factors further.
Interest Rates and Fees
The interest rate on an asset-based mortgage can vary greatly depending on the specific type of loan asset used as collateral, the loan amount, and other factors.
Borrowers should also be aware that some lenders may charge additional fees or require a higher down payment for certain types of assets. For example, lenders may require a higher down payment for mortgage-based loans or an immense loan amount for conventional mortgage loans.
Borrowers should also consider the down payment they must make when taking out an asset-based mortgage. Typically, borrowers must make a down payment equal to at least 20% of the loan amount for mortgage-backed loans and 10% for conventional loans.
An asset-based mortgage typically requires monthly payments, although the payment terms will vary depending on the loan type and lender.
Borrowers should consider their current monthly income and budget when determining loan amounts and how much they can pay monthly.
The repayment terms of loan-based mortgage payments on an asset-based mortgage can also vary depending on the type of loan and the lender.
Therefore, borrowers should understand the repayment terms before committing to any loan.
Flexibility to Adjust Payment Amounts
Some asset-based mortgage loans offer borrowers the flexibility to adjust their payment amounts depending on their situation. For example, some lenders may allow borrowers to skip a monthly payment or make partial payments during financial hardship.
Helpful Read: Get a Bank Statement Mortgage in 5 Easy Steps
Credit History Requirements for Asset-Based Mortgage Lenders
The credit history requirements for asset-based mortgage lenders may differ from those of conventional mortgage lenders. Most asset-based mortgage lenders will review borrowers’ credit scores and financial history to determine their eligibility for the loan.
However, borrowers with poor or no credit score may still qualify for an asset-based mortgage loan if they have significant assets, a steady income stream, or other qualifying factors.
Self-employed borrowers may also qualify for asset-based mortgage loans if they can provide proof of their income and the mortgage is secure against their home equity or primary residence.
In most cases, asset-based mortgage lenders will not impose prepayment penalties. As a result, borrowers can pay off their loans early without incurring additional fees or interest.
Loan-to-Value Ratio (LTV)
The loan-to-value (LTV) ratio for asset-based mortgage loans typically depends on the type of asset used as collateral.
Generally, mortgage-based loans may have an LTV of up to 90%, while other assets like bank or retirement accounts may have a lower LTV ratio.
Availability of Asset-Based Mortgages in your Area
Asset-based mortgage loans may only be available in some areas. Therefore, borrowers should contact mortgage brokers or local financial institutions to determine if asset-based mortgage loans are available in their area.
Asset-based mortgage loans can be an excellent option for borrowers who need an alternative financing solution. However, it’s essential to understand the different factors involved with asset-based mortgage loans before committing.
Borrowers should consult with a mortgage broker or financial advisor to ensure they are making an informed decision about their loan options and to determine if an asset-based mortgage loan is suitable for their financial goals.
By learning more about asset-based mortgage loans and researching the availability of such products in your area, you can make sure you are making a decision that is best for your financial future.
Frequently Asked Questions
Q. Can I get a mortgage based on assets?
A. Yes, you can apply for an asset-based mortgage loan. Generally, mortgage-based loans may have an LTV of up to 90%, while other assets like bank or retirement accounts may have a lower LTV ratio.
Q. What is an asset-based mortgage loan?
A. Asset loan in the mortgage is a mortgage loan that uses the borrower’s assets as collateral for the mortgage.
This loan allows borrowers to use their liquid assets, such as bonds, stock, and cash accounts, as leverage in obtaining additional financing for home purchases or refinancing.
Q. What are some pros and cons of asset-based mortgages?
A. The pros of asset-based mortgage loans include flexible payment terms, no prepayment penalties, and the ability to secure financing without a traditional income source.
However, borrowers should be aware that asset-based mortgages typically come with higher interest rates and require additional paperwork for approval.
Q. What type of assets are accepted as collateral?
A. Most asset-based mortgage lenders will accept physical assets like real estate, marketable securities, government bonds, and other investments.
Some mortgage lenders may also accept non-physical assets such as retirement accounts or a borrower’s monthly income.
Q. What are the four types of asset-backed financing?
A. The four main types of asset-backed financing include mortgage-based loans, asset-based lines of credit, mortgage bonds, and mortgage insurance.
Q. Who offers asset-based mortgages?
A. Asset-based mortgage loans may be available from various lenders, including traditional banks and mortgage brokers.
To find the best mortgage lender for your needs, contact HomeAbroad to help us compare offers from multiple asset-based lenders.
Q. How does an asset mortgage work?
A. An asset mortgage involves using one or more of the borrower’s assets as collateral for a loan. This type of mortgage typically offers borrowers more flexibility and access to funds than conventional loans.
Still, it may also have stricter requirements regarding income verification and payment amounts.
Q. Who offers asset-based mortgages?
A. Mortgage brokers, banks, financial institutions, or other lenders may offer asset-based mortgage loans. Therefore, researching different options and comparing mortgage products is vital to find the best loan that meets your needs.
Q. Are there prepayment penalties?
A. In most cases, asset-based mortgage lenders will not impose prepayment penalties. As a result, borrowers can pay off their loans early without incurring additional fees or interest.
Q. How do you qualify for asset-based lending?
A. Generally, borrowers need significant assets, a steady income stream, or other qualifying factors to qualify for asset-based mortgage loans.
Self-employed borrowers may also qualify for asset-based mortgage loans as long as they can provide proof of their income and the mortgage is secure against their primary residence.
Q. Is an asset-backed loan the same as a mortgage?
A. An asset-backed mortgage is a loan secured against the value of your assets, such as property, investments, and savings.
It differs from a traditional mortgage, settled against your primary residence or a down payment.
Q. Is there any minimum asset value required to get an asset mortgage?
A. Most mortgage lenders will require a minimum asset value of at least $10,000 or more to qualify for an asset mortgage. Borrowers should contact their mortgage lender to determine the exact asset requirements.
Q. What is the difference between asset-backed and mortgage-backed securities?
A. Asset-backed securities are investments backed by mortgage loans and other types of assets, such as auto loans or credit card receivables.
Mortgage-backed securities are investments that you can fund with mortgage loans only. Asset-backed and mortgage-backed securities are suitable for trade on the stock exchange or through private investors.
Q. What is the interest rate for an asset-based loan?
A. Interest rates for asset-based mortgage loans change depending on the loaner and the borrower’s credit rating. Generally, asset mortgage loans offer lower interest rates than traditional mortgage products.
Q. Can I use an asset mortgage to buy a home?
A. Yes, asset mortgage loans can be used to purchase a home. However, borrowers must provide proof of income and assets and meet other mortgage requirements to qualify for the loan.
They may also be subject to additional fees and restrictions due to using assets rather than traditional income as security for the mortgage.
Q. How does an asset-based loan work?
A. An asset mortgage is a financial product that allows borrowers to use liquid assets as collateral for their loan. For example, borrowers can use various marketable securities, such as stocks, bonds, or physical assets like cars or jewelry.
The lender will assess the value of the borrower’s assets and determine if they can provide the loan.
Q. Can you use assets as collateral for a mortgage?
A. Yes, borrowers can use their assets as collateral for a mortgage.
Q. Is asset-based lending good?
A. Asset-based mortgage loans can be an excellent option for borrowers with assets to use as security for the loan but may not qualify for traditional mortgage products.
It can also be an option for those needing more income to qualify for a conventional mortgage loan or want to get income verification immediately.
Q. Can I get a mortgage if I have assets but no income?
A. Yes, you can use your assets to secure a mortgage loan even if you don’t have any traditional income sources.
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Prior to co-founding HomeAbroad, Amresh has worked for one of