An asset-utilization loan is a good option if you have an irregular income but a strong personal net worth. This article will explain the benefits of this useful mortgage.
The economic situation for many Americans in changing. Traditional income sources are becoming less common, and while many people still earn a typical paycheck, there are dozens of different ways that people earn a living and bring in money.
Using Equity from the Sale of a Home to Qualify for an Asset-Utilization Loan
From the self-employed business owner to the property investor to the freelance designer, the traditional way of approving someone’s income is fading. To keep up with this trend, we try to offer a variety of options so you can reach mortgage approval even if you have a unique, out-of-the-ordinary income. These options include an asset-utilization loan.
What is an Asset-Utilization Loan?
This loan doesn’t use typical income resources, such as paystubs and tax returns, but instead uses your assets to reach approval. There are many types of assets that you can use, including checking accounts, savings accounts, market money accounts, stocks, CDs, and bonds. You can also use mutual funds and retirement accounts, including your 401(k) and IRA.
This mortgage product can perform three important functions, each creating a unique benefit. First, it may help you qualify for a loan when other mortgage products are unavailable. You may find that without these products, you simply can’t qualify for a mortgage, as most of them are based on paystubs and tax returns. With this loan, you can, in extreme cases, go from mortgage rejection to mortgage approval.
The other benefit is larger loans. You may still earn an income that is documented with paystubs and tax returns, but it may only be a portion of your salary and earnings. This could leave you with only a small loan when it comes time to purchase. However, if your assets are added to your income, you could qualify for a much larger mortgage.
There is another benefit to using assets, including equity, on your home loan: lower interest. While this is not guaranteed, it’s possible to have a lower interest on your loan if you list your equity and other assets on the application. The loans that use assets will often use them as collateral on the loan, which reduces risk to lenders. And if the risk is lower, the lender is able to provide a lower interest rate.
So savings, investments, and even property can be used to enhance your borrowing power. But what if the majority of your wealth is tied into your home? What if your personal wealth is largely home equity? Fortunately, we have an option for that as well!
What is “ Home Equity?”
If you own your house, you have an asset worth tens of thousands, hundreds of thousands, or even millions of dollars. But what if you have a loan on the home? Then, unless your loan balance is larger than the value of the property, you have what’s known in the real estate industry as “equity.”
Home equity is simply your personal ownership of the home compared to the mortgage balance. Suppose you have a property worth $800,000, on which you still owe $400,000. In this case, you have exactly 50% equity. If you still owe $600,000 on the same house, your equity would be 25%, in that you own 25% of the property value, while the bank owns the other 75%.
People across the country may own a few thousand in investments, yet have hundreds of thousands in home equity. It seems perfectly reasonable to assume that there are people whose home equity represents their single-largest financial asset.
So, if someone can use things like non-liquid assets, such as stocks and bonds, for their loan, why not their home equity for an asset-utilization loan? For that matter, why not equity from the sale of a home?
If you have a house with significant equity, and you are selling the property, you’ll likely see a large profit. How much of a profit, of course, depends on the sale price and how much you have left on the mortgage, but it could equal well over a hundred thousand dollars. Generally speaking, the longer you have owned the home, the larger your equity will be.
Who Benefits from an Asset-Utilization Loan?
While anyone with assets may be able to use the asset-utilization program, there are a few specific situations when this is most common. First of all, anyone with an irregular income will benefit. This means sales associates who largely work on commission. This means business owners who may be paid in large sums once a contract is completed. This means property investors who may bring in all of their income during a few days each month.
Of course, it all depends on actually having equity in your home, which means people who benefit also need to be homeowners who have been making payments for at least a few years.
When is it Useful to Use Home Equity
There are a variety of situations when you will use home equity as an asset on your next mortgage application. The first, and probably the most common, is when you are purchasing a new property and selling your current property. In this case, the equity that is locked into your home would, essentially, be converted into cash after the home is sold. This cash, whether it’s invested or simply placed in a savings account, could then become an asset that is listed on your mortgage application.
The other situation is when you are buying a second home or investment property. In this case, your lending agent, assuming they are able, can use the value of your equity as an asset, creating stronger buying opportunities.
Reach the Approval You Deserve with Our Excellent Team!
If you need to use assets, including equity, for your next mortgage, give us a call. We are experienced in a variety of mortgage loans, and we’ll do our best to help to achieve final approval, regardless of your income source.