What is Asset-Based Lending?

Asset-based lending for real estate requires a loan to be secured by real estate which can be residential, commercial or any other type of property. The primary concern for loan approval for asset-based lenders is the value of the property and amount of equity or down payment of the borrower. Conventional lenders consider the property value and equity but primarily focus on credit scores and income history. Another commonly used term for asset-based lending is equity-based lending.

The focus on property value and the equity of the borrower allows asset-based lending companies can to provide funding faster than what is available from conventional lenders. In addition, asset-based lenders can overlook issues such as bad credit, lack of income history and other problems on a borrower’s record. These issues generally force a bank to deny a borrower's loan request.

Asset-based lenders are protected from the borrower defaulting on the loan as the lender can force the sale of the property to recover their funds. Hard money lenders (also known as private money lenders) are commonly consider to be asset-based lenders.

Asset-Based Lending for Real Estate Investors

Real estate investors often will use asset-based hard money lenders for quick approvals and funding with few requirements and relatively little documentation. Asset-based lending can allow for loans to be funded within 1 week. A similar loan from a bank could take 1-2 months for approval and funding.

Hard money loans for residential real estate are generally available from any hard money lender. Specialized hard money lenders may offer loans for niche types of property such as commercial, industrial and land. Asset-based hard money lenders can often fund many different types of loans.

Asset-based loans commonly require a down payment of at least 25-30%. For a refinance, the borrower will need to maintain at least 25-30% equity in the property. The down payment (or maintaining equity) provides protection and reduces risk for the lender. This is commonly referred to as the borrower having “skin in the game”. The larger the borrower’s down payment or equity the higher the chance of receiving approval for the loan. Asset-based lenders are more willing to provide better terms to the borrower for a lower loan to value ratio.

Asset-Based Lending for Primary Residences

While almost all asset-based lenders provide business purpose investment property loans, there are far fewer asset-based lenders who provide owner occupied consumer purpose loans. These types of loans are subject to additional government regulations, require the lender to have more licensing and require additional steps for underwriting the loan.

Asset-based lenders who lend on primary residences can consider short-term loans to financially strong borrower’s who are have a reasonable exit strategy.

Asset-Based Lending Rates

Asset-based lender rates are often much higher than conventional lender rates. Asset-based lending interest rates are commonly in the range of 8-11%. The specific rate may depend on various factors such as the loan to value ratio, property type and location, strength of the borrower and the lender. Some lenders offer hard money 2nd mortgages with interest rates of 10-12%. While the rates are higher, these loans are intended for short-term use only. The speed of funding and approval as well as the convenience of flexible lending criteria are typically worth the higher cost.

North Coast Financial is a direct asset-based hard money lender providing asset-based lending in the state of California for both business purpose and consumer purpose.