Asset-Based Lending
By: Steve Bush
There are some new options for high-net worth individuals with limited income. If you are retired with no stream of income other than your interest and dividend income on the millions you have in under-performing stocks (I’m crying a tear for you if you fit into this mold), asset-based lending might be what you need.
In the old days, a stated income loan was the way to handle someone with this predicament. Stated income is gone. We know that. When that went away in mid 2007, so did most of the California broker’s pipelines. The problem in California was when the median home price was up to $633,000 and the rates were at 6%, you need at least $200K of net income and low debt to qualify. Self-employed borrowers often write off much of their gross receipts.
Technically, all mortgages are asset-based because the loans are secured by the house as the asset, but this works a little differently.
To calculate the Asset Utilization income stream, take the sum total of all qualified assets and multiply by 4%. This would equal the annual sum of funds that would qualify for the cash flow analysis to be added with the borrower’s other income to come up with a total income amount.
Example:
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- Total Liquid Assets …….. $1,350,000
- Minus Minimum Assets …….. $ 250,000
- Minus 12-months reserves …….. $100,000
- Amount for Asset Utilization …….. $1,000,000
- $1,000,000 x .04 ÷ 12 = $3,333.33
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In this example, $3,333.33 can be added to the borrower’s monthly qualifying income.
It’s not much, but it can help someone qualify who is close. There are rules for what assets can be used as well, but the best part of the program is that it will let you “double dip.” i.e., you can still use any interest income used on the qualifying account(s).
There are also “pledged asset” programs which will allow a lender to lend above the normal guidelines if the borrower pledges their assets. This one is a little more complicated, but the Cliff’s Notes version is that if the lender will increase their exposure if you let them come on as a temporary silent owner on your asset accounts. If you default on the loan within three years, the lender has the access to the funds.
If you’re interested in exploring any of these options, just give us a call (800)657-7771, ext. 103.
