Everything to know about asset-based mortgages

As a homeowner, there may come a time when you’d like to buy a second home. However, if you’ve retired or have a limited cash flow, obtaining a second mortgage loan can be challenging. Lenders usually require proof of income, which can be limited if you’re no longer working. 

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Luckily, an asset-based mortgage may be an option if you have enough liquid assets. In this article, we’ll discuss what an asset-based mortgage is, how it works, its pros and cons, and financing alternatives for homeowners with limited or no income. 

Asset-based mortgage: An overview

An asset-based mortgage is a home loan secured by a borrower’s investments, retirement accounts, savings accounts, or other liquid assets. These assets can supplement or replace the income requirements on a mortgage application. Not all lenders offer asset-based loans, but those that do, allow homeowners to qualify for financing without collateralizing their primary residence.

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These loans are best for borrowers who have substantial assets but insufficient or irregular income, like retirees, investors, and business owners.

Eligible assets

If you’ve never applied for an asset-based mortgage, you may be wondering which assets are eligible.  Here is a list of assets that often qualify:

• Investment accounts: Stocks, bonds, mutual funds, ETFs, and REITs are all eligible assets for an asset-based mortgage. 
• Retirement accounts: 401(k)s, IRAs, and Roth IRAs are also eligible assets as long as there are no penalties associated with early withdrawal. 
• Bank accounts: Checking, savings, and money market accounts are stable and liquid assets eligible for an asset-based mortgage. Lenders may require borrowers to have at least six months of mortgage payments saved up in these accounts when they apply.  
• Other assets: Inheritances, annuities, trust funds, and life insurance policies can also be eligible assets.

How an asset-based mortgage works

The process of applying for an asset-based mortgage is similar to applying for a regular mortgage – but with different requirements. Here is how an asset-based mortgage works:

Step 1: The borrower submits an application 

When applying for an asset-based mortgage, borrowers are asked to provide information about their assets, credit score, and income (if they have any). Asset-based mortgage lenders may also ask for details about the property you intend to purchase. Lenders will then verify this information and assess the liquidity of each asset.

Step 2: The lender evaluates the borrower’s assets and income

Lenders evaluate a borrower’s income and assets using a specific formula that accounts for asset value, expected rate of return, depletion rate, and the terms of the asset-based loan. Lenders usually allow borrowers to leverage 100% of their liquid assets but only 70% of their retirement and investment accounts.

Step 3: The lender determines the borrower’s eligibility

Using the borrower’s income and asset evaluations, the lender calculates the borrower’s debt-to-income ratio (DTI). The stronger your assets, the lower your DTI ratio will be, which could improve your chances of getting approved. Lenders also evaluate borrower credit score, credit history, and other financial factors relevant to your application. 

Step 4: The loan agreement is created

Once the borrower is approved, the lender creates a loan agreement and sets loan terms based on the borrower’s financials. Upon signing the agreement, the borrower receives the funds needed to purchase the new property. As long as the borrower makes their monthly payments, they maintain full control over their assets.

Pros and cons of asset-based mortgages

If this is the first time you’ve considered an asset-based mortgage, you may be curious about its benefits and drawbacks. Consider the pros and cons of asset-based mortgages below: 

Pros

• Lenient income criteria: The key benefit to an asset-based mortgage is the ability to qualify without a high or stable income. This allows borrowers who are fully or partially removed from the workforce to obtain financing through the assets they’ve worked hard to accumulate over the years.
• Larger loan amounts: Borrowers can often access greater funds through an asset-based mortgage than a conventional, income-based loan. This can facilitate the purchase of a larger, more desirable property, or simply allow homeowners to access a greater amount of home equity.
• Competitive interest rates: Lenders often perceive borrowers who put up collateral as less risky. Collateral allows lenders to offer lower interest rates on secured loans. 
• Flexible financing options: Asset-based financing isn’t limited to mortgages. Some lenders offer asset-based cash-out refinances, allowing borrowers to convert a portion of their equity into cash.

Cons

• Stricter credit requirements: In addition to strong assets, asset-based mortgages also require borrowers to have higher credit scores. Most lenders look for credit scores of 680, or above.
• Excessive documentation: Asset-based lenders need to thoroughly evaluate each asset being presented, which often results in more documentation for the borrower. 
• Associated fees: Asset-based mortgages come with unique fees, such as audit and due diligence fees, that are necessary for lenders to evaluate and monitor your assets. This can drive up the cost of financing for borrowers, including more than one asset in their application.
• Collateralizing your assets: As with any secured loan, the biggest risk to the borrower is defaulting on the loan and losing ownership of their assets. 

Financing alternatives 

Depending on the amount or type of assets you have, an asset-based mortgage may be too complicated for you to pursue. Some borrowers prefer not to put their assets at risk. If you identify with either scenario, you may want to explore the following financing options.

Home equity investment (HEI)

A home equity investment (HEI) allows homeowners to tap into their home equity without taking on additional debt. Borrowers enjoy no monthly payments, no income requirements, and flexible credit evaluations. Homeowners with a credit score of at least 500 can qualify for an HEI. 

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In exchange for a lump sum of funds, homeowners provide a portion of their home’s future appreciation and settle the agreement sometime within 30 years. Homeowners often pay out their equity agreement when they sell or refinance. 

Home equity loan or HELOC

Another way to leverage your home equity is through a home equity loan or home equity line of credit (HELOC). A home equity loan provides borrowers with a lump of cash that is repaid at a fixed interest rate over a loan term of 5-30 years. 

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A HELOC provides borrowers with a revolving line of credit that can be accessed for 5-10 years during the withdrawal period, and is repaid over 20 years during the repayment period. HELOCs usually come with variable interest rates. This can raise monthly payments by the time the repayment period starts. 

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Borrowers with no income may qualify for a home equity loan or HELOC if they’re self-employed, or meet other criteria.

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Hard money loan

A hard money loan is a short-term loan used in real estate transactions to facilitate the purchase or renovation of a property. Hard money lenders are usually private investors or companies who charge high interest rates to borrowers who need quick funding. Loan terms range from 12-36 months, and interest rates range from 7-12%.

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Borrowers who don’t qualify for traditional financing and are willing to put the property in question up for collateral may be good candidates for a hard money loan. However, these loans are considered risky and expensive. Borrowers are encouraged to carefully assess their finances to ensure they’re able to pay back the loan within the specified loan terms. 

Final thoughts on asset-based mortgages

Asset-based mortgages allow homeowners with limited to no income, but valuable assets to qualify for a mortgage. However, leveraging your hard-earned assets isn’t always ideal. If you were to default on your loan for whatever reason, you could lose some or all of your assets, depending on your loan agreement. Be sure to discuss your financing options with a professional before committing to one.

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Take advantage of no income requirements and no monthly payments with a Home Equity Investment from Point. Explore Point’s HEIs here.

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