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An asset-based loan is calculated by adding up all the assets of a borrower as collateral. Asset based loans are traditionally used to lend money against inventory, equipment, or accounts receivables. More recently, lenders have begun giving investors and traditional borrowers the ability to purchase homes using assets owned by the borrower. This type of loan is also known as an asset-based mortgage. The total sum number of the asset is then divided by 84 months to calculate your ability to repay debt service for a mortgage.
This is a type of non-qualified mortgage that is giving borrowers who have limited monthly income to leverage their assets such as inheritance, stocks and funds gifted to them to purchase a home. As noted above, this type of loan is calculated by taking the total asset for example you have $1,000,000 in your bank savings account and is divided by 84 months. In this case, the result would be $11,904.76 per month which will be used as the basis used to calculate your income to service the new mortgage payment. In other words, the total asset is spread out over the mortgage term for lenders to be able to determine the ability of borrower to repay the debt.
Another example, if the borrower decides to use their stock trading account as the basis for the asset, then only 80% of the total value will be used towards calculating the available monthly cashflow. If we take the example above for $1,000,000 and this came from a stock trading account, then $800,000 would be used as the basis of asset divided into 84 months which equals $9,523.81 per month.
The last example would be using a retirement account, in this case the lender will use 70% of the total asset, therefore, $700,000 becomes the basis of the asset to calculate the monthly income. In this case, $8,333.33 per month becomes the monthly income to be used in the calculation to underwrite your loan approval.
1. Bank Deposits – checking, savings, money market accounts
2. Publicly traded stocks and bonds
3. Mutual Funds
4. Retirement Accounts
1. Minimum credit score 620
2. Qualified based on verifiable liquid assets
3. No Tax Return or 4506T required.
4. Interest only option available
5. Cash out allowed on refinance.
6. Loan amounts up to $3 million
Although lenders discount the value of the asset based on the asset class, borrowers still have opportunity to purchase the home of their dreams if they have a strong enough asset base to begin with
How do I get it? There are many financial service companies offering asset-backed lending. The Commercial Finance Association is made up of banks as well as independent finance companies.
The key to a small business is finding lenders who are willing to lend lines of credit to young companies. This can be difficult and may require some research. Because it is more expensive to monitor an asset-based loan, lenders prefer to make larger loans.
However, it should not be difficult to obtain an asset-based loan if your company has strong financial statements, good reporting systems and commonly sold inventory. Customers who have a history of paying their bills should also be considered.
You will need to provide accurate and detailed financial information in order to secure an asset-based loan. The key is to make the lender comfortable with a credible case for long-term viability, as well as professionally-prepared financial statements that prove you have a handle on the business.
The upside: Asset-based loan can provide capital to companies that are growing rapidly, high-leveraged, or undercapitalized. Sometimes, a company just needs cash to overcome a financial hump and prevent growth from stalling.
These loans are particularly suitable for service, manufacturing and distributor companies that have a leveraged balance sheet and who face seasonal challenges and business cycles that can impact their cash flow. Acquisitions can be funded with asset-based loans.
Your company will be subject to field examinations as part of the process. This will determine the quality and level of its financial assets and physical assets. The inventory appraisal and field examination determine which collateral is eligible and what advance rates they are allowed to receive.
The ABL approach has one advantage: it is free from many of the cash-flow lending covenants. These include the requirement that companies have certain levels of debt service coverage or leverage. If a company experiences a decline in sales, such as the one that occurred during the coronavirus pandemics, a faltering cash flow could lead to it not meeting its covenants. Lenders can reduce credit availability, raise interest rates or take other steps to prevent loan losses. ABL is a way to reduce the lender’s concern about your potential default. To avoid being subject to a financial covenant, your business will only need to have a minimum amount of liquidity.
Anything is possible, but you need to have strong assets on account in the form of cash in your checking, savings, or stock trading account. Lenders really like to see a stable steady stream of income from your job or self-employment. Fortunately, there are programs available which enable borrowers who have substantial savings and liquid assets to get approved for a home loan. These loans usually come with a higher interest rate and will require at least 20% down payment. Lenders will calculate your ability to repay the loan based on your total liquid assets divided by 84 months. This figure will become the basis of your monthly income used to qualify for the loan. You will still need a minimum FICO score of 680 in some cases lenders may consider as low as 620 but it really depends on the financial snapshot you provide to the lender’s underwriter. Lenders will verify these assets through bank statements usually will need to provide 12 months-worth to prove the funds have been seasoned.
There are two types of asset-based mortgage loans. The first type is for purchases. If you’re looking to buy a new home or build one this is a great option for you. Alternatively, if you already own your home and you want to take advantage of low interest rates currently available, then refinancing your home could be the best bet.
How can I get an asset-based mortgage loan?
The process to get an asset-based mortgage loan is very similar to a traditional mortgage loan:
1. Talk with loan consultant about your situation and put together loan options.
2. Complete the loan application with your lender through online secure portal.
3. Submit the application along with supporting documentation
4. Once your application is received you can lock in your rate
5. You will receive disclosures for your signature, these disclosures spell out the fine print of your rate, term and closing costs.
6. You will need to provide any additional supporting documentation if required.
7. Your loan will be processed with an underwriter which takes 2 to 5 business days.
8. Set up appraisal inspection, takes 2 to 4 weeks, and you can pay additional for a rush.
9. Your loan is approved, lender will provide needful documents to notary for execution.
10. Notary schedules signing for review and execution of loan documents.
11. You have a 3 day right of recession after the loan documents are executed
12. Once the recession period is passed, then the loan is funded and recorded
Lenders have minimum requirements to be approved for asset backed mortgage. The most important factors are amount of liquid assets and FICO score. If these two criteria are not met, then it’s virtually impossible to get approved. Applications are reviewed and considered on a case-by-case basis. Each lender has its own criteria so find the right fit for you. The best candidates for these types of loans are self-employed, entrepreneurs, heirs to wealth, or high net worth borrowers.
The longest part of the process to get approved for an asset backed mortgage is the appraisal. Depending on market conditions, the appraisal itself can take 2 to 4 weeks from the time it’s requested to the time it’s completed. Assuming it takes 2 weeks to get the appraisal completed, you can expect your loan to close in 30 days.
To learn more about Asset Based Loans and how you can qualify