It can be challenging to qualify for a traditional mortgage if you’re unable to prove your income on paper. But you’re not completely out of luck. An asset-based mortgage could be a viable option if you have a substantial amount of liquid assets. Read on to discover seven key facts about asset-based loans, key advantages and disadvantages you should be aware of, and how to find a lender offering these mortgages.
What is an Asset-Based Mortgage?
As the name suggests, asset-based mortgages use your assets to determine if you qualify for a home loan. So, instead of providing traditional income documentation, like pay stubs, W2s and tax returns, the lender classifies assets as income to compute the loan amount you’re eligible for.
They’re ideal for borrowers who are small business owners or self-employed with a hefty sum of liquid assets, even if their income fluctuates. Investors and retirees with a sizable amount of assets are also a good fit for asset-based mortgages.
Important Facts to Know About Asset-Based Mortgages
Before shopping around for an asset-based mortgage and applying with a lender, here are some important facts you need to know.
1. How It Differs from Traditional Mortgages
When you apply for a traditional mortgage, the lender assesses your creditworthiness, debt-to-income ratio and employment history to determine if you’re a good fit for a loan and how much you qualify for. Your creditworthiness also plays a role in your approval odds for an asset-based mortgage, but the amount you’re offered will generally depend on the value of your assets.
2. Type of Assets You Can Use
Most lenders cap loan amounts at 70 percent of investment and retirement assets. However, you may be able to use up to 100 percent of your liquid assets as your borrowing base for a home loan. Liquid assets include cash held in your checking and savings accounts and money market accounts, along with stocks, bonds, mutual funds, retirement accounts and certificates of deposit. (CDs)
3. Calculating How Much Your Assets are Worth
To illustrate how you’d calculate the value of your assets for this type of mortgage, assume you have $450,000 in verifiable liquid assets. If you’re requesting an asset-based mortgage with a 5-year repayment period, your monthly mortgage payment should not exceed $7,500. But if the loan term is 10 years, the payment would be limited to $3,750.
To determine the total monthly mortgage payment in this scenario, you’d divide the total amount of verifiable liquid assets by the number of months in the desired loan term. In this case, you’d divide $450,000 by 60 and $450,000 by 120 to come up with the maximum monthly payment amounts of $7,500 and $3,750.
4. Pros and Cons of an Asset-Based Mortgage
Below are some key advantages of asset-based mortgages:
- You could be eligible for a loan regardless of your income since the loan amount is based on the amount of verifiable liquid assets in lieu of earnings.
- Alternative loan qualification using your verifiable assets makes it easier to get approved, and you won’t have to jump through several hoops to prove to the lender that you’re a good fit for a mortgage.
- Some lenders offer asset-based cash-out refinance mortgages that allow you to convert a portion of the equity you’ve built up in your property into cash to use however you see fit.
There are also drawbacks to consider:
- You can only use these loan products on second homes or investment properties.
- You could get a higher interest rate and possibly pay more in closing costs than you would with a traditional loan.
5. Who Can Qualify for an Asset-Based Mortgage
Individuals with a hefty sum of verifiable assets may qualify for an asset-based mortgage. Remember that these assets should be liquid and easily convertible into cash.
6. Requirements for an Asset-Based Mortgage
The eligibility guidelines for asset-based mortgages vary by lender. However, you should be able to provide proof of qualifying assets and meet the lender’s seasoning requirements for both assets and adverse credit events (if applicable). Most lenders also require that you own a primary residence before you apply.
7. How to Get an Asset-Based Mortgage
You likely won’t find asset-based mortgages at traditional banks and credit unions.
Established in 2010, Angel Oak Mortgage Solutions is a full-service mortgage lender offering innovative home loan solutions to consumers with varying financial backgrounds. So even if you don’t qualify for traditional home loan products, you may be eligible for a mortgage from its suite of loan products.
Non-traditional or non-QM lending solutions include:
- Asset Qualifier Loan: This allows borrowers with liquid assets to qualify for a much larger home loan rather than looking at your employment, income, or DTI. There is a requirement, however, that all assets must be sourced and seasoned for a minimum of six months.
- Bank Statement Home Loan: It allows home buyers to use personal or business bank statements from the last 12 or 24 months to qualify for a mortgage. You’ll need two years of self-employment to qualify, and loans range from $150,000 to $3 million.
- Investor Cash Flow Loan: This loan caters to real estate investors looking to expand their portfolio of investment properties. Instead of providing tax returns or income statements, the lender will use the investment property’s projected earnings to calculate the amount you’re eligible to borrow – generally between $75,000 and $1.5 million.
- Portfolio Select Home Loan: If you’ve recently experienced bankruptcy, foreclosure, deed-in-lieu or short sale, you may be eligible for this type of mortgage without having to wait seven years. Instead, the seasoning period is only one year for adverse credit events (or two years for bankruptcy). Loan amounts are between $250,000 and $2.5 million.
- Jumbo Home Loans: These home loans are ideal for borrowers looking to acquire luxury homes or those with sales prices that exceed the conforming loan limit set forth by the Federal Housing Finance Agency (FHFA). Depending on your creditworthiness and debt-to-income ratio (which cannot exceed 50 percent), you may be eligible for a loan of up to $3.5 million with a down payment as low as 10 percent.
Angel Oak Mortgage Solutions also offers more traditional home loan solutions, like:
- Conventional Home Loan: It is a popular mortgage product offering several down payment options to help borrowers get into the home of their dreams.
- FHA Home Loan: Backed by the Federal Housing Administration (FHA), these home loan products also feature flexible down payment options, and you don’t need perfect credit to qualify. It’s possible to get approved with a down payment as low as 3.5 percent, and seller contributions of up to 6 percent are allowed.
- USDA Home Loan: Borrowers looking to purchase in an area that the US Department of Agriculture designates as rural may be a good fit for this loan product. Be mindful that income restrictions apply, depending on your household size and location.
- VA Home Loan: These loans are backed by the Department of Veterans Affairs and exist to serve both current and retired veterans and qualifying relatives. You could be eligible for 100 percent financing, and there’s no monthly mortgage insurance requirement.
You can learn more about this highly-rated, reputable and how its team of licensed mortgage professionals can help you complete this simple online form.
