The toughest part of fulfilling the American Dream is homeownership. It is tough because conventional lending tools make it impossible for individuals with non-traditional sources and income streams to apply. This leaves behind many potential homeowners. Thanks to the ever-evolving realm of real estate mortgage, recent times have brought around a tailor-made solution for these people- Asset-Based Mortgages. This lending tool accommodates people with non-traditional income sources and credit profiles.
Comprehending Conventional Mortgage Challenges
The top three things every traditional lender looks for are a stable job, proper income documentation and a robust credit score. These help lenders gauge the risk involved and the borrower’s creditworthiness. This method has proven itself with time as it is the most opted for. However, a major drawback of this method is that it leaves self-employed, freelancer, and gig-working individuals in the dust. In other words, people with atypical financial scenarios have nowhere to go. The added pressure of having a solid credit report also leaves behind people who experienced financial turmoil in the past.
Asset-Based Mortgages: The Foundation
Asset-based mortgages go a different route and emphasize the value of the assets owned by an individual rather than focusing on the traditional markers of creditworthiness and financial stability. This enables the borrower pool to be more diverse and inclusive. Assets can include savings, investments and also cryptocurrencies. This shift in focus allows many potential homeowners to realize their dreams.
The Role of Assets
Traditional lending solutions disburse the loan amount depending on the income and creditworthiness of the borrower. However, asset-based mortgage programs primarily focus on the borrower’s assets. The liquidity and value of these assets are what decide the loan amount. The different types of assets taken under consideration are listed below:
Real Estate: Besides the value of assets like undeveloped land and owned properties, the rental income from properties is also considered as an asset.
Investment Portfolios: Investments made by the borrower are also taken into consideration, and they include bonds, stocks, mutual funds, and other investments.
Retirement Accounts: Retirees can also make use of their Individual Retirement Accounts, 401(K)s, and others.
Business Ownership: Partnering in or owning an operational business is also considered an asset as long as it makes money.
Cryptocurrencies: Cryptocurrencies are new-age assets that have come in with the digital age, and lenders of this tool also take this into consideration.
Effect on Unconventional Borrowers
One of the major upsides to asset-based mortgages is their ability to include unconventional lenders who sport uncommon or sometimes multiple streams of income. This includes:
Self-Employed Earners: Not everyone works a regular job that gives out consistent paychecks. That said, self-employed people like freelancers and business owners find it difficult to match up to the high documentation standards set by conventional loans.
Gig-Workers: Gig-workers may not have a consistent stream of income, but they do possess the ability to own lucrative assets that can be leveraged by asset-based mortgage programs.
Retirees: Older folks with limited or no income can also own substantial assets, which can be present in the form of retirement savings. Since asset-based mortgages consider savings as an asset, they can be used to buy a home.
Individuals with a Bad Credit Report: People who have gone through financial trouble in the past have low credit scores, which is a red flag as far as traditional mortgages go. However, asset-based mortgages take the bigger picture into perspective and offer a chance at redemption.
Income Documentation Flexibility
Asset-based mortgages are also quite lenient when it comes to income documentation, unlike the strict policies of traditional mortgages. Unconventional lenders can seldom produce proper income documentation for traditional loans. Asset-based mortgage programs take into consideration many alternative forms of income verification, which include bank statements, asset depletion calculations, and investment statements. This doesn’t just lower the bar of entry but also negates a lot of paperwork, making the entire process seamless and quick.
Merits of Asset-Based Mortgages
The paradigm shift brought in by asset-based mortgage programs in the real estate investment and financing realm is unparalleled. It has many advantages associated with it.
Accessibility and Inclusivity
By considering a wider base of borrowers, asset-based mortgage programs are improving inclusivity by leaps and bounds, to say the least. They present homeownership opportunities to individuals with unconventional sources of income who were otherwise denied by traditional lenders.
Recognizing Wealth Beyond Income
By emphasizing assets, these solutions acknowledge that financial stability and wealth can be measured in multiple ways and not just consistent paychecks. This consideration is key for people with a net worth associated with real estate, investments, and other unconventional assets.
Custom-made solutions for Unique Profiles
Asset-based mortgages realize the uniqueness of every borrower. These solutions offer more customizable deals that take into consideration the particular scenario each borrower is in, providing a tailor-made experience which is absent in traditional mortgages.
Ability to Adapt to Economic Shifts
The ever-present flexibility in asset-based mortgage programs places borrowers on a pedestal that makes it easier for them to navigate the tricky terrain of homeownership in unpredictable economies. These solutions allow for a stronger sense of financial security as income streams evolve and economic realms shift.
Seamless Application Process
The conventional mortgage application process is infamous for its cumbersome and lengthy documentation demands. Asset-based mortgage programs make this process seamless by emphasizing asset valuation and lessening the load on the shoulders of borrowers to present detailed income documentation.
Asset-Based Mortgage Programs vs Traditional Mortgages
Approval Criteria
Traditional mortgages emphasize a borrower’s income, credit and employment history. The loan amount is also determined by the borrower’s capability to pay monthly mortgage payments, which is closely associated with a stable income.
Asset-based mortgage programs focus on asset valuation. The liquidity and value of these assets are the main character during the approval process.
Income Verification
Traditional mortgages demand documents like tax returns, pay stubs and W-2 forms to determine consistent income generation. Borrowers need to go through extensive paperwork to gain approval.
Asset-based mortgage programs are more malleable when it comes to income documentation. While conventional sources are taken into account, these solutions can also take into account the likes of bank statements, asset certification and much more.
Credit Scores
Traditional mortgages demand a high credit score and a spotless history which helps lessen the risk and safeguard the lender.
Asset-based mortgage programs are way more lenient, particularly if an applicant owns substantial assets. The consideration of asset values allows for a lower credit score to be accommodated.
Asset Types
Traditional mortgages do not, even for one bit, take any of the borrower’s assets into consideration. This is the same for approval and the loan amount to be disbursed.
Asset-based mortgage programs categorically focus on asset valuation, which includes real estate, retirement accounts, investment portfolios, cryptocurrencies and business ownerships/partnerships.
Employment Status
People with steady jobs have it easy when it comes to getting conventional mortgages approved, courtesy of their regular paychecks. Self-employed individuals and others with irregular streams of income have a tough time proving their creditworthiness.
Asset-based mortgage programs are far more inclusive since they consider the value of assets. They accommodate people with non-traditional income sources.
