Unlocking Mortgage Opportunities: A Guide to Asset-Based Financing
I have a lot of clients who don’t have a traditional income stream or are self-employed. Many times these clients have lots of assets, such as cash, stocks, retirement funds, etc. but don’t show enough traditional income on tax returns to buy the house they want. In cases like these, I use products that allow the use of assets as income verification. In this article I’ll explain the concept of asset-based financing and provide you with a comprehensive guide on mortgage options that allow for asset-backed mortgages.
Understanding Asset-Based Financing:
Asset-based financing, also known as asset depletion or asset dissipation, is a mortgage qualification method that considers a borrower’s assets rather than relying solely on their income. This alternative approach widens the eligibility criteria for mortgage applicants and helps those with substantial assets but limited documented income to secure financing.
Types of Assets Considered:
When it comes to asset-based or asset-backed financing, lenders typically consider a wide range of assets, including
- Retirement Accounts
Cash and Cash Equivalents: This includes funds in checking and savings accounts, money market accounts, and certificates of deposit (CDs).
Investments: Marketable securities, stocks, bonds, mutual funds, and other investment vehicles that can be easily converted into cash.
Retirement Accounts: Funds in 401(k)s, IRAs, and other qualified retirement plans.
Calculating Income from Assets:
There are different mortgage options depending on the type of assets as well as your age.
- If you have assets in a 401k and are 59 ½ or older, you can use a 1-time distribution to establish your income. There must be enough in the 401-k for the distribution amount to last 3 years or more. I have helped many clients get Fannie Mae/Freddie Mac as well as jumbo loans using this method. If you are older than 59 ½ with a 401k this is BY FAR the best method.
- If you are under 59 ½ but have significant assets you can take a distribution from these accounts. Depending on the account type the amount will be adjusted, and the distribution must last 7 years.-Checking- 100%
-Business Checking – 100%
-Marketable Securities/Stocks 80%
- If you are under 59 ½ and have significant assets but do not wish to set up a distribution, you must have at least 10 years of assets that will be used as monthly income
Asset Qualifier – No Income Requirements
Under this mortgage program, only assets are considered. Typically this program requires a 30% down payment. Asset balances are determined by asset type:
- Cash and cash equivalents-100% of face value
- Marketable securities (excludes unvested RSUs and Stock options) – 80%
- Retirement funds – 70% unless if borrower is of retirement age, then use 80%. If utilizing a retirement account, document the borrower’s ability to access the funds.
- The cash surrender value of an annuity or life insurance contract – 100%
- Bitcoin: must be liquidated and deposited into a United States bank/financial institution account, or a bank/financial institution account from our Deposit must be seasoned for a minimum 60 days.
- The proceeds of sale from documentable assets owned by the borrower over the prior six (6) months
The typical requirement is that assets after closing (according to the above calculations) must equal 125% of all outstanding mortgage debt for which the Borrower has personal liability.
Asset-based financing opens doors for individuals who have significant assets but may not meet traditional income requirements. If you are considering this type of financing, it is crucial to work with an experienced mortgage professional who can guide you through the process and help you leverage your assets effectively. With the right approach and expert advice, we can help make your dreams of homeownership a reality.