Sometimes people have moderate or inconsistent incomes, yet need a mortgage loan that allows the purchase a world-class home. Fortunately, assets such as physical property and investment accounts can be utilized for your next purchase.
How (and Why) You Can Use Assets to Qualify for a Mortgage Loan
Important Note: Different Lenders, Different Rules
While we can give you a general idea for using various properties to qualify for a mortgage, it’s important to note that every lender will have different rules. Some of the tips, suggestions, and information we provide may not apply to all lenders, so you should speak with a qualified expert to determine whether or not your assets will qualify.
Why Use Assets on Your Mortgage Applications?
There are many different reasons why someone would list their assets on their mortgage application, but the most obvious is that they have no income. By this, we don’t necessarily mean the unemployed, but rather we mean the retired. If you have retired and live on a small fixed income, but have hundreds of thousands or even millions in assets, leveraging your assets to secure a loan can be useful. Without your assets, your income (or lack thereof) may be insufficient for securing a mortgage loan.
There is also the distinct possibility that your assets could help enhance your borrowing potential, which may result in a larger house or a home in a better area. Listing your assets can provide the boost you need for a larger loan by giving greater reassurances to lenders.
Why Not Just Liquidate the Assets?
It’s a fairly common question, and if you think about it a fairly obvious one as well. Instead of listing the assets and using a loan, why not just sell the assets and purchase a property? You will pay for the home anyhow, why not just skip the loan entirely?
This is certainly an option, but some people prefer to maintain their assets, allowing them to grow in value. Or they may actually need the property. High-value businesses equipment, for example, may be needed to maintain your income, or you may not want to part with your vacation home or recreational vehicle. Either way, this step allows you to keep the assets while making an affordable home purchase.
What Types of Assets Can be Used to Qualify for a Mortgage?
In reality, almost anything of significant value can be listed as an asset on the mortgage application. Most commonly, people will use cash and cash equivalents on their mortgage application. This can include anything you have on hand, including money in your checking and savings accounts, market accounts, CDs, and other accounts.
Physical property is also commonly used in these programs. This includes anything that you own of value, such as other real estate property, vacation homes, cars, RVs, jewelry, artwork, antiques, and collectibles.
Non-physical assets can also be utilize to advance your loan. Anything of value that does not have a physical presence could qualify, such as a 401(k) account, stocks, mutual funds, and bonds.
If you go over your assets and consider everything you own, from the jewelry box to the garage to the investment account, you likely have more assets that you realize. And if you own them, it may be useful to put them to use as part of your mortgage application.
Who Should Consider These Loans?
These loans can be useful for practically anyone, but in general you will find they are most ideal for retirees, investors, business owners, and any high net-worth individual who wants to purchase a home.
Retirees are possible the most common group of people who use these loans. Generally they have little income but have a strong net worth that is based on 401(k) and other retirement accounts, so they are often prime candidates.
Investors and business owners can also use these loans, as they tend to own a lot of value but may not have an income that reflects this wealth. Investors may own millions in stocks, mutual funds, or even real estate, but have a relatively small or inconsistent income. Business owners may also have an income that varies, but own hundreds of thousands or even millions in equipment, property, and other assets.
Regardless of your specific situation, it may be wise to talk with your lender and see if your assets should be used on the loan.
How to Complete This Step of Your Application
When you use this type of mortgage, you will be borrowing against these assets, which means the bank or lender has the right to seize them in case you are unable to repay the loan. (More on this below.) The amount you are granted is called the borrowing base, and it’s usually established as a percentage of the total value.
Generally, lenders will use the 70% rule for investment accounts and retirement-based assets, such as 401(k) accounts. Because these assets are directly tied to the stock market, they could possibly drop in value. (Anything can, in reality, drop in value, but it’s more of a possibility with investments.) Basically, the lender will use 70% of the value of these accounts, so if you have $1 million in investments, for the sake of the mortgage loan it adds $700,000 to your asset total.
Other assets will be calculated at 100%. So a vacation home worth $1 million will add $1 million to your asset total.
Losing Assets: The Rare but Real Risk of Asset-Based Loans
Before wrapping up, we should be completely clean on the potential risks involved with asset-backed loans. Basically, you are putting these assets at risk, and if you are unable to pay, you could lose them. So be careful, cautious, and wise before you place a family vacation home, heirloom jewelry, or your family’s financial nest egg at risk.
Get the Right Advice with an Honest, Trustworthy Lending Agent
With the support of an honest, experienced lending agent, you can find the right strategy for your next property purchase. Contact us today!