The same strategy that drove foreclosure rates through the roof during the housing bust – 100 percent financing – is rearing its ugly head again. Lenders say these loans are safer because, in the majority of cases, they are offered to people who have sizable assets, and they typically require two forms of collateral – the home and a portion of the person’s investment portfolio instead of the traditional cash down payment.

Borrowers in many of these transactions wind up with one loan and one monthly payment. Depending on the parties involved, approximately 60 percent to 80 percent of the loan is often tacked to the value of the client’s home, and the left over 20 percent to 40 percent can be drawn from investments. This strategy allows affluent clients to finance real estate transactions without tying up money or withdrawing funds out of accounts earning interest.

The market’s recent gains plus low lending rates is causing some clients to pursue 100 percent financing as an arbitrage play, where the return on their investments is larger than the rate they pay on the loan, which can be as low as 2.5 percent.

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Some banks only provide adjustable rates with these loans, which means the amount could rise exponentially if rates rise. Except in rare circumstances, the institution holding the investment account and providing the loan must be the same.

There are also a number of tax benefits to these transactions. Borrowers aren’t required to liquidate their investment portfolios in order to secure financing, which allows them to sidestep the capital-gains tax. Additionally, some clients may be able to take advantage of the mortgage-interest deduction. (Borrowers can usually deduct interest payments on up to $1 million of mortgage debt.)

Here is what the Wall Street Journal’s MarketWatch says to consider before signing up:

  • Portfolio restrictions. The amount homebuyers can borrow against investment accounts will depend on what the portfolio comprises. In most cases, they can get up to 95% if the account comprises cash, up to about 80 percent if it’s bonds, and between 50 percent and 75 percent with stocks. Withdrawing pledged funds is typically restricted while the loan is outstanding.
  • Relationship pricing. To get the lowest rate, clients who already have significant assets at a particular bank should consider applying for 100 percent financing there.
  • Underwriting standards. Borrowers will still need to pass regular underwriting requirements, including having a high credit score, a low amount of overall debt—including student debt—and providing documentation of substantial income or assets.

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This is filed under National Markets.


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