An asset mortgage loan can be a viable option for those who have difficulty qualifying for a conventional loan, especially if they have significant assets. Similar to a home equity loan or cash out refinance, asset mortgage loans allow individuals to borrow against the value of their property, except in this instance, it can be any kind of property instead of just their primary residence.
At Defy Mortgage, we provide aspiring homeowners with a simplified and streamlined home loan process, including fast pre-approvals and competitive rates. Whether you’re an entrepreneur, business owner, freelancer, self-employed individual, or real estate investor, our 75+ non-traditional mortgage options can be tailored to your unique needs,
Although we currently only offer asset depletion mortgages at Defy, our experiences in the mortgage space have made us well-acquainted with different types of asset financing options, including asset mortgage loans. In this blog, we’ll discuss the different types of assets you can use for an asset mortgage loan, how lenders decide on their value, and what you can do to get the most out of the assets you pledge.
Let’s jump in.
**Please note that Defy Mortgage does not currently offer asset mortgage loans, but we do offer asset-depletion loans for those with substantial liquid assets.
Types of Assets You Can Use for an Asset Mortgage Loan
There is a wide variety of assets that you can use as collateral to apply for an asset mortgage loan, including cash, investments, real estate, and even retirement accounts and collectibles. However, keep in mind that the assets that you choose will directly impact your chances of approval, depending on how lenders value them.
Liquid Assets
Liquid assets, including cash, checking accounts, and savings accounts, are highly favored by asset-based mortgage lenders due to their immediate accessibility and verifiability through bank statements. These assets are considered the most valuable for qualification purposes because they represent guaranteed funds that require no liquidation or conversion.
As borrowers, you should aim to maintain a steady balance over time in these accounts, as fluctuations can raise red flags for lenders. Lenders who offer these loan types also view liquid assets as a buffer against financial instability, as these funds can be immediately used to cover mortgage payments in the event of income disruptions.
Investment Accounts
Investment accounts, such as stocks, bonds, and mutual funds, are also considered valuable when lenders assess approval odds for an asset mortgage loan. Even though their value may fluctuate due to market volatility, these accounts have the added benefit of demonstrating a borrower’s ability to accumulate wealth and maintain financial stability over time, which increases lender confidence. Lenders view a well-diversified investment portfolio as a sign of sound financial management, which can strengthen your application.
Retirement Accounts
Retirement accounts such as 401(k)s, IRAs, and pensions can also be submitted. However, their value may be reduced to account for the penalties and taxes that would apply should you need to access these funds prematurely.
It’s important to note that retirement assets are not the most liquid asset. The restrictions on accessing these funds make them less desirable from a lender’s perspective, especially if you haven’t reached retirement age. That being said, lenders who offer these loan types may consider these accounts more favorably if the borrower has met certain criteria to withdraw without penalties.
Non-Liquid Assets
Non-liquid assets, such as real estate, business equity, and collectibles, are typically more difficult to convert into cash quickly. While these assets are less favored than cash or liquid investments, lenders may still consider them in the mortgage approval process, albeit at a reduced percentage of their market value depending on the type of asset.
Despite their lower liquidity, non-liquid assets can still play a vital role in securing financing, especially for borrowers with significant real estate holdings or business interests. Real estate, for instance, may be valued based on its current market appraisal, but the ease of selling property or business stakes can vary greatly. Similarly, while collectibles such as rare art, antiques, or high-value cars can hold substantial worth, they are less predictable in terms of market demand.
Keep in mind that asset mortgages differ from asset depletion mortgages, which treat assets as an extension of your monthly income rather than as collateral for the loan itself. Asset depletion loans typically only allow for liquid assets, while asset mortgage loans and other types of asset financing can accept non-liquid assets such as real estate, collectibles, and even business inventory.
How Lenders Determine Usable Asset Value
**Please note that Defy Mortgage does not currently offer asset mortgage loans.
Determining the value of usable assets, also known as asset valuation, involves appraising how much money an asset is worth when liquidated. Essentially, lenders who do offer asset mortgage loans want the asset to be valued high enough to cover the loan amount, minimizing their risk in the event of a default. Here’s how they arrive at the asset’s value:
Discounts and Deductions on Assets
First, the lender will establish the borrowing base by gauging the resale value of the asset based on factors such as historical data and current market demand. The lender will then apply discounts and deductions to the base value of the asset. Often referred to as a “haircut”, these adjustments account for any potential loss in value.
If the lenders apply discounts to the value of the asset, the asset’s value as collateral will be reduced. Here’s a breakdown of typical discount rates applied to common asset types:
- Liquid Assets: Cash reserves and other liquid assets can easily be transferred to the lender in the event of a default, so borrowers can use 100% of their value as collateral to secure a loan.
- Investment accounts: Investment accounts, including stocks, bonds, and mutual funds, are valuable but subject to market fluctuations. Lenders typically discount these assets by approximately 30% to mitigate risks associated with market volatility.
- Retirement accounts: Although technically liquid, lenders consider retirement accounts reduced liquidity due to penalties when the funds need to be accessed prematurely. For instance, with a 401(k), early withdrawal before the age of 59½ could lead to a 10% penalty in addition to income taxes. Most lenders will discount these types of accounts by approximately 30% to reduce risks.
- Non-Liquid Asset: Non-liquid assets, such as real estate, business equity, and collectibles, are more challenging to convert into cash quickly. Lenders may discount these assets by up to 50% to reflect the potential difficulties and time involved in selling them. These factors could delay debt repayment in the event of a default.
To summarize, discounts and deductions account for potential loss in value due to market conditions, the nature of depreciating assets, and the effort and cost involved in liquidating them. This helps mitigate the lender’s risk of not being able to access sufficient value from the assets in the event of borrower default.
After analyzing the overall conditions of the asset and taking out the deductions accordingly, the lender will give a percentage of the borrowing base that they are willing to extend as a loan, also known as the advance rate. Assets with low advance rates may have to be supported with additional assets to secure your desired loan amount and terms. Keep this in mind when deciding which type of asset to pledge.
Asset Reserve Requirements
Once the asset’s value has been established, the lender will estimate the number of monthly mortgage payments it can cover if liquidated. This tends to be more straightforward with cash reserves or retirement accounts that already contain liquid funds, unlike other assets whose value can vary.
For non-liquid assets, the estimation may not represent the final resale value. If the value of the asset decreases due to unforeseen market events or accidental damage, you may owe the lender more upon default.
Lender-Specific Policies
Mortgage providers value assets differently. Some prioritize liquid assets, while others may offer more flexibility with non-liquid holdings. Some might not accept certain types of assets, such as machinery and other items liable to rapidly depreciate. At Defy, for example, we only offer asset depletion loans, which consider liquid assets.
It’s important to consult with multiple asset-based mortgage lenders to compare terms and discounts. Doing so will help you find the best options available and secure the most favorable loan terms for your asset portfolio.
Maximizing the Assets You Can Use
Understanding how to present your financial portfolio effectively can make a significant difference in qualifying for an asset-backed mortgage. Preparing your assets with precision not only boosts your chances of approval but also helps maximize their value in the eyes of the lender. Here are some tips for how you can prepare your assets:
Organize and Document Your Assets
Presenting your assets clearly and comprehensively is crucial to showcase your financial stability and transparency. Make sure to–
- Provide Detailed Statements: Offer comprehensive account statements that demonstrate consistent balances, regular contributions, or historical growth. This can help highlight your financial reliability.
- Include Supporting Documents: For non-liquid assets, provide appraisals, market valuations, or historical sales data to substantiate their worth.
- Consolidate Accounts: Streamline your financial records by consolidating accounts where possible. This reduces complexity and makes it easier for lenders to verify your assets.
Proper documentation ensures the actual value of your assets is considered, minimizing the chances of undervaluation due to incomplete or unclear records.
Work with a Financial Advisor
While we can give financial advice, a financial advisor or wealth manager can. A financial advisor can optimize your asset presentation and suggest strategies to reduce liabilities, thereby increasing your net asset value. They can:
- Help identify assets that are most favorable for inclusion based on lender criteria.
- Advise on reducing liabilities to improve your overall net asset value.
- Offer insights on reallocating investments to enhance liquidity or stability, aligning with lender preferences.
A financial advisor’s expertise can help you frame your financial position in the best possible light, increasing the likelihood of approval.
Choose the Right Lender
Not all lenders specialize in asset-backed mortgages, so selecting the right one is critical. Consider the following when choosing the right lender:
- Experience with Asset-Based Mortgages: Look for lenders familiar with asset-backed financing to ensure they can accurately evaluate and leverage your portfolio.
- Comparison of Policies: Compare lenders’ discount rates, collateral acceptance criteria, and overall flexibility.
- Interest Rates and Terms: Evaluate the rates offered and the terms of the mortgage to ensure they align with your financial goals.
Partnering with a lender who understands your asset profile can help streamline the process significantly. If an asset-depletion loan is of interest to you instead, we’ve listed what we require for our asset depletion loans at Defy Mortgage below:
- Proof of liquid assets (liquid assets only) from your investment and bank accounts, not your income.
- Affordability is based on the total value of your liquid assets divided by as little as 60 months.
- Eligible assets typically include savings and checking accounts, investment portfolios like stocks, bonds, and mutual funds and retirement accounts like IRAs and 401ks (depending on age)
- No tax returns required
- Minimum FICO score of 620+
- Fixed/ARMs – Interest-only options
- Up to 80% Max Loan-to-Value (LTV)
- No maximum loan amount
- Only available for primary residences and second home
Keep in mind that exact LTV requirements will depend on specific applicant information, such as credit score, DTI, and other factors, and can be subject to change. For more accurate information regarding fees and terms based on your financial profile, contact us by booking a call with us or giving us a ring at (615) 622-1032.
Asset Mortgage Loan FAQ
What percentage of my investment accounts can be used to qualify for an asset mortgage loan?
Typically, 70-80% of the total value of investment accounts, such as stocks, bonds, and mutual funds, will be qualified conservatively. This accounts for factors such as market volatility. Some lenders may require evidence of consistent account performance to provide more favorable terms.
Are retirement accounts always considered in full for asset mortgage loans?
No, retirement accounts are usually not considered at full value. Lenders often apply a discount of 20-30% to account for penalties and taxes associated with early withdrawals. For instance, if your IRA contains $200,000, only $120,000 to $140,000 might be usable toward qualification, depending on the lender’s policies.
Can non-liquid assets like real estate be included in asset qualification?
Some lenders may accept non-liquid assets such as real estate, but they are generally valued at a lower percentage of their market value. Lenders often consider 50-70% of the appraised value of these assets. Factors like property type, market stability, and ownership details can influence how much of your non-liquid assets will count toward your qualification.
What is the minimum amount of assets required to qualify for this type of loan?
The minimum amount of assets required depends on the size of the loan you would like to take out. For example, if you want to take out a loan of $36,000, the assets you pledge should be at least that amount after applying the haircut rate and paying the down payment.
Do all lenders use the same formula to calculate usable asset value?
No, lender policies and formulas for calculating usable asset value differ widely. Some lenders may prioritize liquid assets, while others might offer more flexibility with non-liquid or high-value assets like real estate. Consulting multiple lenders and reviewing their specific criteria can help you identify the best match for your financial profile.
Are asset mortgage loans the same as asset-depletion loans?
No, they are not the same. Asset depletion loans use primarily liquid assets to supplement the borrower’s income for qualification purposes. By contrast, asset mortgage loans allow borrowers to pledge non-liquid or semi-liquid assets, like real estate and antiques, as collateral. The value of the asset itself is the main determiner of loan terms.
Key Takeaway
An asset mortgage loan can be the perfect tool to provide flexibility to homebuyers who may have irregular incomes or unconventional cash flow. By leveraging enough substantial assets, borrowers can secure enough funding to purchase a home, without having to supply proof of income. However, an asset mortgage loan can come with stricter requirements and it’s important to understand the ins and outs for the best chances of approval.
If an asset mortgage loan sounds right for you, remember to carefully consider which asset types to pledge based on how lenders evaluate them. It can also pay to apply strategies to maximize asset value to improve the chances of loan approval with ideal terms. Although we don’t offer asset mortgages at Defy, we do provide plenty of other non-QM options like asset depletion loans, bank statement loans, and DSCR loans.
If you’re ready to explore other loan options, book a call with Defy Mortgage today or give us a call at (615) 622-1032. Let’s help you achieve your homeownership goals with confidence!
