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Asset-based lending – A great alternative when traditional mortgages do not fit

February 17, 2011

iStockphoto,houses,economy,dollars,US currency,notes,paper folding,concepts,finances,real estates,loansIn this time of tightening guidelines, it is becoming more and more difficult to find the right mortgage loan.  Often times idiosyncracies associated with the borrower or property can actually eliminate traditional mortgage loans as an option.  As a result, programs such as asset-based lending have grown in prominence for many borrowers.

Asset-based lending, sometime called securities-based lending, allows a borrower to borrower money against a portfolio of securities.  This alleviates the restrictive nature of mortgage lending and allows for a buyer to leverage themselves in a time of low rates.  In most of the cases where an asset loan makes sense, the only other option is a cash offer, which unnecessarily ties up assets into a property costing a borrower significantly in lost appreciation and dividends resulting from liquidated assets.

Other fantastic benefits of these loans are that they often require minimal documentation.  Our program at Chicago Bancorp, for example, allows for a client to apply without the encumbrance of a credit check or income verification.  Additionally, the loan is non-recourse, which protects the borrower from entering into a financial sink hole if the market suffers unexpected loses.  Finally, a securities-based loan can even save mone over a traditional mortgage.

Example:

Purchase Price: $2,000,000

Traditional Mortgage

  • Mortage amount of $1,600,000
  • LTV of 80%
  • Interest Rate of 8%
  • Mortgage payment of $11,740
  • Monthly Income of $25,000
  • Debt Service Ratio: 47%

Tough loan these days as far as originating and selling at a good price.

If a collateralized security loan is done for $600,000 and used as a down payment the transaction changes dramatically:

  • Purchase Price: $2,000,000
  • Security loan: $600,000
    • Rate: 3.5%
    • Monthly payment of $1,750 (simple interest and paid quarterly)
  • Regular Mortgage: $1,000,000
    • LTV: 50%
    • Interest Rate of 7.75% (rate is reduced due to lower LTV and lower loan amount)
    • Mortgage payment of $7,164
    • Total Monthly Payment: $8,914

Benefits

  • Monthly savings: $2,826 (24% savings) 
  •  Debt Service ratio: 35%

In the end, there is no perfect loan structure.  Less flexibility in the lending marketplace has made it even harder to find a single solution that meets the complete needs of many borrowers.  This should, however, never stand in the way of a qualified borrower getting the home that they want.   Asset-based lending, represents a good option for overcoming lending obstacles when a traditional mortgage fails to fit the property or the client.

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