Asset-Based Lending: Explore Asset-Based Loans in Real Estate

ABL stands for asset-based lending. An asset-based loan by definition is a type of non-QM loan that’s secured by a borrower’s assets rather than income. Asset-based loans for real estate allow people with significant liquid assets—like savings or investments—to qualify for a mortgage without using traditional income verification. ABLs and asset depletion loans are ideal for retirees, business owners, or anyone with irregular income who still has strong financial reserves.

In order to be eligible for asset-based loan financing, you must have qualifying liquid assets in your name. Qualifying assets include things like:

• Checking and savings accounts
• Certificates of deposit (CDs)
• Investment accounts
• Money market accounts

Ineligible assets for an asset-based mortgage loan include things like:

• Machinery and equipment
• Inventory
• Real estate
• Vehicles
• Art and collectibles

Getting an asset-based home loan can be a good idea if you have substantial liquid assets but don’t qualify for traditional mortgage loans. Asset-based home loans offer flexibility and faster approval, especially for retirees, self-employed individuals, or those with irregular income. However, keep in mind that rates may be slightly higher than conventional loans, and you’ll need to show strong asset reserves. Asset-based loans tend to be best for borrowers with stable finances who want to leverage their assets without selling them.

Asset-based loans can help you save money when buying a house by allowing you to qualify without traditional income documentation, potentially speeding up approval and avoiding costly delays. If you have significant assets but limited taxable income, these loans may enable you to access better financing than you’d get with conventional loans, helping you avoid things like PMI while still securing a competitive rate. Asset-based loan financing can also allow you to buy sooner. With an expedited application and underwriting process, ABLs and asset depletion loans allow you to potentially lock in a lower home price or interest rate before markets shift.

If asset-backed lending doesn’t suit your needs, there are several other financing options to consider. Each of these alternatives can be beneficial depending on your financial situation and the type of property you’re looking to purchase:

• Bank statement loans
• P&L loans
• Conventional loans
• DSCR loans
• Hard money loans

Common costs involved in getting an asset-based loan include:

• Down payment: In order to qualify for an asset-based loan, you must provide a minimum down payment of 20%.
• Mortgage interest: You will lock in your interest rate when applying for your mortgage and pay it over the life of the loan.
• Discount points: You may be able to purchase discount points before closing, which means you can pay money upfront to lower your rate.
• Closing costs: Common closing costs include origination fees, appraisal fees, credit report fees, title insurance, and legal costs.
• Prepayment penalty: Many asset-based loans come with a prepayment penalty, meaning you must pay a fee if you pay off your loan balance too early. Speak with your lender to determine whether they have a prepayment penalty.

Here’s a step-by-step guide to getting an asset-based loan:

1. Apply with a lender: Begin by finding a lender that offers asset-based loans or mortgages and submit an application.
2. Identify your assets: Determine which assets you will use to qualify for the loan. These might include bank accounts, retirement funds, and investment accounts.
3. Submit documentation: Provide the lender with the necessary documentation to verify the value and ownership of your assets.
4. Initial review: The lender will conduct an initial review of your application and assets to determine if you are a good candidate for an asset-based mortgage.
5. Receive preview offer: If the initial review is favorable, the lender will present you with a preview offer outlining potential loan terms. At this point, you can accept or reject the loan terms and rate offered to you.
6. Complete asset review: The lender will then perform a thorough audit of your assets to confirm their value and eligibility.
7. Approval and funding: Once the full review is complete and your assets are verified, you will receive final approval and the funding for your loan.

The cons of asset-based loans include:

• Not all assets qualify: Certain types of non-liquid assets, like inventory or machinery, cannot be used to secure the loan.
• Higher rates than conventional loans: Interest rates are often higher compared to traditional mortgage rates.
• Loan amount is limited to the value of your assets: The maximum loan amount is constrained by the value of your assets, which may not always meet your needs.

The Secured Overnight Financing Rate is an index that calculates a weighted average of the interest rates that major financial institutions charge for overnight loans. When a mortgage is tied to this index, it is possible to get a mortgage rate that will automatically adjust to the 30-day average of the SOFR index. With our 6 month SOFR asset utilization loan, you can take out an asset-based loan with a low-interest rate that’s locked in for a predetermined amount of time. Once that introductory period ends, your interest rate will begin to adjust every 6 months based on the SOFR index, meaning your rate could potentially rise or fall.

To calculate the qualifying amount of your asset-based loan, you will need to determine your maximum monthly loan payment. First, you need to calculate the total value of your available assets. Then, divide the total by either 5 years, 7 years or 10 years depending on the asset-based loan program. For example, you may have $600,000 in liquid verifiable assets and your total mortgage payment is $10,000 per month. Since you have 60 months’ worth of assets, you would qualify and meet the ability to repay requirements.

An asset-based loan is a type of mortgage that allows you to qualify based on the value of your liquid assets, rather than your income, tax returns, or employment history. The lender converts a portion of your verified assets, such as funds in bank accounts, CDs, or investment portfolios, into “qualifying income” using an asset-depletion formula. You still maintain ownership and control of your assets throughout the process.

By contrast, a pledged asset loan (sometimes called a pledged asset mortgage) requires you to use your assets as collateral. Instead of selling or liquidating those assets, you “pledge” them to the lender as security for the loan. This approach can help you avoid private mortgage insurance (PMI) or reduce your down payment, but your pledged assets may be restricted or frozen until the loan balance reaches a certain threshold.

While both loan types rely on your financial assets, they differ in how those assets are treated:

A Securities-Backed Line of Credit (SBLOC) is also different. An SBLOC is a revolving credit line backed by your investment portfolio. Unlike an asset-based mortgage, SBLOC funds can be used for any purpose (not just home financing), but it carries the risk of a margin call if the market value of your securities drops. In short:

• Asset-based loan: Converts assets into qualifying income for a mortgage.
• Pledged asset loan: Uses assets as collateral for the mortgage.
• SBLOC: Uses securities to secure a line of credit, not a mortgage.