What are pledged assets?
A pledged asset is what is transferred to a lender in order to secure debt. A pledged asset mortgage is a type of home loan that is secured with assets or securities, rather than liquid funds. Qualifying funds may not be from a 401k or an individual retirement account (IRA). Pledged asset funds may also be used to help a qualifying relative purchase a home.
In some instances, using pledged assets as a down payment make more sense for home buyers. Several factors must be looked at when considering the pledged asset mortgage. The assets in question, if cashed out for a down payment, could cause a significant tax liability to the client. In other instances they may have a higher rate of return than the interest rate on the loan. Typically, these types of mortgages are recommended for clients in higher tax brackets.
Twenty percent of the home, in cash, is often what lenders require to secure a loan. Less than 20% down is viewed as risky investment for lenders, so higher rates are charged as well as mortgage insurance. Pledged asset mortgages are viewed as less risky and can be obtained without mortgage insurance and sometimes carry a lower interest rate. With these types of loans, the borrower often needs to pledge assets valued at greater than 20% of the home. That particular agreement is to be worked out between the lender and the borrower.
If you have questions about this type of loan or any inquiries about the home loan process, we welcome your messages and phone calls.