If you’re a non-traditional borrower, asset based finance for mortgages could be your key to homeownership. Instead of focusing on income, this type of financing looks at the value of your assets, which provides more flexibility for high-net-worth individuals – those with $1 million or more in investable assets. While some lenders use this term as a catch-all for loans that qualify you based on your assets, it’s important to note that asset-based finance isn’t the same as asset-depletion loans, though the two are often grouped together. With the top 5% of Americans holding an average net worth of $1.03 million, this type of financing is specially designed to meet the unique needs of wealthy borrowers.
In the sections below, we’ll break down how asset-based finance works, explore its key benefits, and clarify how it differs from other asset-focused loan products. Let’s dive in!
Understanding Asset Based Finance
Asset based mortgages let you qualify for a home loan using your assets instead of traditional income, making them a great option for people with a high value of assets but irregular or unconventional income streams. Lenders usually look at assets like savings accounts, investment portfolios, real estate equity, and other eligible assets. These can be broken down into liquid assets, like cash and stocks that are easy to access, and non-liquid assets, such as real estate or collectibles, which can take longer to convert to cash.
While Defy Mortgage doesn’t offer asset based finance, we do provide asset depletion loans. With this option, you can use your liquid assets to qualify for a home loan, offering a flexible way to leverage your wealth for homeownership.
How Does Asset Based Finance Work?
Asset based finance is a unique lending approach where the loan is secured by specific assets you own, rather than relying on traditional income verification. The application process typically requires documentation like bank statements, investment account records, and proof of equity in real estate or other assets. Lenders use these documents to calculate your borrowing power, basing the loan amount directly on the value of the pledged assets. Loan terms and interest rates can vary depending on the lender, but they generally offer flexibility by aligning the loan terms with your asset values. All in all, asset based finance provides a tailored solution for those with substantial assets, making it easier to unlock capital without the limitations of conventional income requirements.
Asset Depletion Loans vs. Asset Based Finance
While both asset depletion mortgages and asset based finance for mortgages are tailored for borrowers with substantial assets, they take very different approaches when it comes to qualification. Next, we’ll cover each in more detail to help you differentiate the two financing options.
Asset Depletion Loans:
If you’re looking for a mortgage for a property and have significant liquid assets, an asset depletion loan could be the perfect fit. These loans work by assessing your liquid assets, like savings, checking accounts, investment portfolios (stocks, bonds, mutual funds), and even retirement accounts (IRAs or 401(k)s, depending on age), instead of your income. Lenders calculate your affordability by dividing the total value of your liquid assets by a set number of months, usually 60. Loan options vary and might include fixed rates, adjustable rates, or interest-only options, depending on the lender.
Example: Imagine you’re retired with $3 million in liquid assets. By dividing that amount by 60 months, you’d have a qualifying monthly income of $50,000, which opens the door to homeownership even without a steady paycheck.
Asset Based Finance:
Asset based finance is more commonly used for business funding but can also be applied to mortgages with certain lenders. With this financing option, the loan amount is tied directly to the value of pledged assets, like business inventory, equipment, or real estate, which gives you access to funds based on your collateral. Lenders assess the current market value of these assets and often consider business performance to evaluate risk. Loan structures tend to be revolving credit lines or term loans, depending on the value and type of assets.
Example: Let’s say you own a business with $1 million in real estate equity and equipment. By using these as collateral, you could secure a loan for a new property, with the loan amount determined by the combined value of your pledged assets.
Asset Based Finance vs. Conventional Financing
When it comes to borrowing, asset-based finance and conventional financing take very different approaches.
Conventional loans rely heavily on income verification, employment history, and credit scores, which can create hurdles for people with non-traditional income streams, like business owners or retirees. In contrast, asset-based finance focuses on the value of your assets, whether it’s liquid assets, real estate equity, or business inventory, to determine your borrowing power. This approach gives you more flexibility, especially for those whose wealth is tied up in investments or illiquid assets rather than a steady paycheck.
While conventional financing typically offers lower interest rates, asset based finance can be a game-changer for borrowers who need an alternative to strict qualification criteria. It’s all about finding the right fit for your financial situation and goals.
Who Can Benefit From Asset Based Finance?
Asset based finance is a flexible solution for those who don’t fit the traditional mold. Here are some examples of who could benefit from asset based finance:
- Self-employed professionals who have irregular or unpredictable income streams.
- Business owners dealing with seasonal fluctuations or varying income levels.
- Real estate investors looking to leverage equity in existing properties to fund new ventures.
- High-net-worth individuals with substantial wealth tied up in investments or tangible assets.
- Entrepreneurs managing diverse portfolios of business and personal investments.
- Retirees with significant liquid assets but no steady paycheck.
- Investors in alternative assets who want to use non-traditional collateral, like collectibles or commodities.
- Start-up founders without established income histories.
If your wealth lies in assets rather than a regular salary, asset based finance for mortgages might be the perfect tool to forge your path towards homeownership.
Pros and Cons of Asset Based Finance
Pros:
- Accessible to non-traditional borrowers like self-employed individuals, retirees, or business owners without standard W-2 income
- Alternative income verification – qualify using your assets
- Those with substantial assets may qualify for favorable rates and loan terms
- Can be used for various needs, including real estate investments, business expansion, or personal financing
- Use assets as collateral without selling them, preserving long-term wealth
Cons:
- Typically has higher rates compared to conventional financing
- Using assets as collateral can limit your access to liquid funds in case of emergencies
- Risk of financial strain by tying up too many assets in loans
- Failure to meet loan terms could result in the forfeiture of pledged assets
Tips for Securing an Asset Based Mortgage
Securing an asset based mortgage requires preparation and the right approach to make the most of your financial situation. Here are some tips to guide you:
Choose a Lender Who Knows Asset Based Finance Inside and Out
Working with a lender who understands the ins and outs of asset based financing can make the process much smoother. While Defy Mortgage doesn’t offer asset based finance, we do provide asset depletion loans, which allow you to use your liquid assets to qualify for a home loan. To learn more about your loan options, book a call with us or give us a ring at (615) 622-1032 for a free consultation with one of our mortgage experts.
Have Your Asset Documentation Ready to Go
Lenders will need detailed documentation of your assets, so be prepared with up-to-date bank statements, investment account records, and proof of equity. The more organized you are, the faster the process will be and the faster you’ll get into your dream home.
Keep Your Credit Score in Great Shape
Even though asset based mortgages prioritize your assets over income, a solid credit score can still help you secure better loan terms and lower interest rates. If your credit score doesn’t meet lender requirements, start working on improving it several months to a year before applying for a mortgage.
Know How Your Assets Will Be Evaluated and Used
It’s important to understand how lenders will review your assets and how they’ll be depleted over the life of the loan. Knowing this can help you better plan your finances and avoid unexpected surprises throughout the process.
Asset Based Finance for Mortgages: FAQs
- What is asset based finance, and how does it apply to mortgages?
Asset based finance uses the value of your assets, rather than your income, to determine your eligibility for a loan. This makes it ideal for those with substantial wealth but non-traditional income.
- Who is eligible for an asset based mortgage?
Borrowers with significant assets, such as high-net-worth individuals, retirees, business owners, or self-employed professionals, are typically eligible for asset based mortgages.
- What types of assets can be used to qualify for an asset based mortgage?
Commonly used assets include savings and checking accounts, investment portfolios (stocks, bonds, mutual funds), real estate equity, and, in some cases, retirement accounts like IRAs and 401(k)s.
- Is an asset depletion loan the same as an asset based mortgage?
No, asset depletion loans are a type of asset based finance that specifically use liquid assets to calculate qualifying income, whereas asset based mortgages may consider a broader range of asset types.
- Can I qualify for an asset based mortgage if I don’t have a traditional job?
Yes! Asset-based mortgages are designed for borrowers without traditional income, such as retirees, self-employed individuals, or business owners.
- Are retirement accounts like IRAs and 401(k)s considered assets for these loans?
Yes! Retirement accounts can be considered, though their eligibility may depend on your age and whether you have penalty-free access to the funds.
- Do all lenders offer asset based finance for mortgages?
No, not all lenders provide asset based financing. It’s important to research lenders that offer asset based finance and check their requirements to confirm your assets are eligible.
- Do my assets need to be liquid for asset based finance?
Not necessarily – while liquid assets are usually preferred, some lenders may also consider non-liquid assets like real estate equity or other valuable holdings. While lenders often group asset-based finance and asset-depletion loans together, these are distinct lending types. Asset-based finance uses your assets as collateral, while asset-depletion loans allow you to use your liquid assets toward loan qualification.
- Do my assets need to be liquid for asset-depletion loans?
Yes! These loans work by assessing your liquid assets, like savings, checking accounts, investment portfolios (stocks, bonds, mutual funds), and even retirement accounts.
