If you own multiple properties and are applying for a mortgage, you have experienced the frustration with mortgage lenders not accounting for the equity in your real estate portfolio when qualifying for a new home loan.
While using the equity from other owned properties is not permissible for traditional loan programs, there is a mortgage financing option that may help to bring a resolution to this scenario. This loan program is also known as an asset-only mortgage loan.
First, it is important to understand how asset-only programs work. While the details vary, most asset-only products require that borrowers have enough verified assets to match the loan amount after accounting for the down payment, closing costs, and reserve requirements.
For example, if a borrower is looking to qualify for a $750,000 purchase with a $500,000 home loan, they must have at least $825,000 in eligible assets.
Down Payment: $250,000
Remaining Loan Amount: $500,000
Closing Costs (estimated): $15,000
Reserves (12 Months PITI): $60,000
Where this can become challenging is that certain types of assets get haircuts based on their liquidity. Checking, saving, money market, stocks, and bonds often allow 100% eligibility, whereas retirement accounts typically allow 70% of funds in the account.
If a borrower’s liquid assets are not sufficient to meet the qualifying requirements, this is where home equity can be looked at instead. Subject to case-by-case approval based on the overall strength of the loan, it is possible to use equity in real estate properties to qualify.
To determine the amount of eligible assets, one must take 75% of the property value (determined by an automated appraisal evaluation) and subtract all outstanding liens* on the property.
For example, if a borrower owns a primary residence valued at $1,000,000 with the only outstanding lien being a 1st mortgage in the amount of $500,000, then $250,000 in equity assets would count towards eligible assets.
($1,000,000 X 75%) – ($500,000) = $250,000
*Note that HELOCs will require the maximum draw amount to be utilized rather than the current outstanding balance in this calculation.
For more information, call us at (760) 930-0569—a licensed Mortgage Consultant is standing by to walk you through it.
