What is Asset-Based Lending in Real Estate?

  • Focus on the asset to underwrite
  • More flexible, more can qualify
  • Definition

Definition of asset based lending in real estate

A business loan secured by collateral that is tangible – like equipment or real estate, compared to unsecured loans that are not secured by any collateral.  When investors exhaust other financing options, like selling shares of the business or selling assets, asset based loan provide an opportunity to raise cash from leveraging account receivables or existing equipment.

In the context of real estate – asset based lending is the underwriting standard by which private lenders review deals.  In contrast to the criteria used by big banks which focuses on credit history, earnings, and tax returns – private hard money lenders focus on the asset instead.  

To illustrate this point – here the partial list of 16 different documents Chase bank requires for you to qualify for a loan:

  • Copies of pay stubs for each applicant, reflecting a minimum of 30 days of income
  • 2 forms of ID
  • Names/addresses of employers for two years
  • W-2s for two years
  • One to two years of tax returns
  • A completed and signed Form 4506-T or 4506T-EZ, provided by your Home Lending Advisor
  • Bank statements for two to three months
  • If self-employed, year-to-date profit and loss statement, plus signed returns for last two years
  • Proof of pension income, if applicable
  • Social Security and Disability payments, if applicable
  • Dividend earnings
  • Bonuses
  • Child support or alimony payments 
  • A copy of earnest money deposit 
  • Information on debts such as car loans, student loans and credit cards
  • Security accounts 
 To contrast, hard money lenders usually require the following documents:
  •  Contract to purchase the property (if applicable)
  • ID
  • Title report
  • Proof of rents and funds to purchase
  • Appraisal
  • Credit report (in some cases)

Both of those lists will change depending on the lender, but they show how different both underwriting processes are – and the main contrast is the focus of the paperwork.  A traditional loan focuses on the individual – the documents they require are all about the burrower – requests to confirm salary, tax returns, and other income.  

In asset based lending, private lenders care about the property – so to qualify you need to show you own it, confirm the rental income, and get an objective assessment of its value.  This difference allows private lenders to fund burrowers that were left behind by traditional lending companies like banks. 

(Related Article: Loan to Cost vs. Loan to Value)


How can Real estate investors use asset based lending?

Real estate investors who can’t qualify for a regular commercial loan, due to bad credit or buying non-traditional real estate, can fund deals through private lenders instead of big banks.  In asset-based lending, the focus of the underwriting is the collateral, not the burrower. So if a person with bad credit find a good deal, there is a better chance for the investors to find financing through an asset-based underwriting.  

Asset based lending also opens the door to less traditional real estate deals.  Regular lenders have rigid lending criteria and anything outside of the box will usually be a reason to deny you.  Take for example just of the few types of new real estate hard money lenders were able to fund before any banks:

What are the advantages of asset based lending?

  • Faster Process – private real estate lending requires less documents to get approved because the focus is the property, not the burrower  
  • Bad/No Credit –  individuals with bad credit history or no credit to begin with can still qualify for a real estate loan
  • Flexibility – 

What are the disadvantages of private lending?

The interest rates of hard money loans is higher compared to real estate loans offered by institutional banks, but overall lower than unsecured financing.  The fees and costs can be higher as well, depending on the type of loan you are seeking.

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