How homebuyers can use ‘pledged’ assets and put just 10% down

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | September 3, 2024

Article originally posted in Orange County Register on August 29, 2024

Have you heard of pledged assets?

They just might be the ultimate real estate leverage.

Pledged assets include cash, stocks, bonds and mutual funds that serve as collateral in exchange for a lower down payment.

Let’s say you are a high-net-worth individual. You want to buy a $5 million home. Ordinarily, it might take a 35% down payment to buy your McMansion or a $1,750,000 down payment.

In this example, the pledged assets program means you put a minimum of 10% actual cash ($500,000) as a down payment. Instead of bringing the remainder of the down payment in cash (25% or $1,250,000) to the closing table, you can pledge assets to cover the $1,250,000 remainder of the down payment. The lender then holds the assets.

Your 25% pledged assets of $1,250,000 are still (hopefully) making money for you with your chosen stocks and your existing investment adviser. Your new mortgage is $4,500,000.

If you were to sell your stock assets and use them for the actual down payment instead of this phantom down payment, you’d be subject to either short-term capital gains tax (stock you’ve had for one year or less) or long-term capital gains tax (stock you’ve held over one year and profited on), according to Jeff Hipshman, a CPA partner at Eide Bailly.

Short-term capital gains are taxed as ordinary income. Long-term capital gains are taxed at 20% or more, he told me.

The assets’ custodian requires $2 in securities for each dollar pledged, or a 2 to 1 ratio. In the example above, you would have a lien on your stock account stock for $2.5 million, not the $1,250,000 phantom loan.

You can also put up cash which has a dollar-for-dollar or 1 to 1 ratio. In other words, you would have an interest collecting account with a securities’ custodian for $1,250,000 when you are using dollars for your pledged asset account instead of stocks, bonds and mutual funds.

You can actively trade within your pledged securities account, too. You just can’t take the money out.

Eligible liquid assets include stocks, bonds, CDs, savings accounts and mutual funds. Retirement accounts like IRAs and 401(k)s are not eligible. Neither are warrants, insurance benefits and 529 or other education savings plans eligible assets.

This program works for buying primary residences, investment properties and second homes.

The person pledging the assets does not have to be the borrower. For example, it could be a parent or grandparent who wants to help his or her kids or grandchildren with the 10% down payment and phantom portion of the down payment.

So, how do you get the pledged funds back?

The custodial account must be in place for at least three years. It’s at the lenders’ discretion to release the funds from the custodial account.

You’ll need a new appraisal providing increased equity/appreciation equal to or greater than the original pledged funds.

Let’s use this example: You’ve got a $1 million purchase price with 10% down and 10% pledged funds or 80% combined loan-to-value. The actual loan is $900,000. Excluding any principal being paid down, and to simplify this illustration, you’d need an appraisal of $1,125,000 or more. In this example the appraisal would reflect 20% equity through property appreciation as one of the checked boxes for the custodial funds release.

The borrower must be current on loan payments with no delinquencies in the past 12 months to qualify for a pledge release.

Loan amounts start at $500,000 up to $30 million for purchase and refinancing.

Loan qualifying in this category can be done traditionally, using tax returns to determine if the applicant has enough qualifying income. Or, the applicant can qualify using alternative methods like 12 months of bank deposits and asset depletion (calculating monthly income based upon liquid assets) or a combination of both.

Many banks have variations of pledged assets lending. It’s worthy of consideration, especially considering the stock market’s performance.

Freddie Mac rate news: The 30-year fixed rate averaged 6.35%, 11 basis points lower than last week. The 15-year fixed rate averaged 5.51%, also 11 basis points lower than last week.

The Mortgage Bankers Association reported a 0.5% mortgage application increase compared with one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $423 more than this week’s payment of $4,770.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.125%, a 15-year conventional at 4.875%, a 30-year conventional at 5.625%, a 15-year conventional high balance at 5.375% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high- balance conventional at 6.125% and a jumbo 30-year fixed at 6.375%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego and Orange counties.

Eye-catcher loan program of the week: A 30-year jumbo fixed rate at 6.125% with 2 points cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.