Never heard of a pledged asset mortgage? You’re not alone.
Pledged asset mortgages, or PAMs, are rare because they use assets such as stocks and bonds rather than the typical income and credit qualifications to secure a home loan.
But if you have a significant investment portfolio, you could tap into this nontraditional way to secure a mortgage and hang on to your assets instead of liquidating them.
“By pledging assets, the borrower provides security for the loan, reducing the lender’s risk and eliminating the need for a traditional down payment,” says Alex Shekhtman, CEO and founder of LBC Mortgage in Los Angeles.
Sound intriguing? Then read on to find out if you can use your investments—to invest in a new home.
What is a pledged asset mortgage, or PAM?
A PAM uses assets such as stocks, bonds, and mutual funds rather than income and credit qualifications to qualify for a mortgage. So you might be wondering: Why doesn’t the borrower sell some stocks and bonds to cover the down payment?
It’s simple: Liquidating assets could be subject to capital gains tax and the end of earning potential income from the investments. However, with a PAM, the borrower still owns the pledged assets and continues to earn income from gains or dividends.
How does a PAM work?
PAMs differ from traditional mortgages. Instead of making a down payment, money is deposited in a pledged, interest-bearing account with a lender.
“When assets are pledged as collateral, the borrower grants the lender a security interest in those assets for the loan’s duration,” explains Shekhtman. “This means the lender has a legal claim on the assets until the loan is repaid.”
The borrower still keeps earning interest or dividend gains on the assets. And in most cases, the borrower can trade or sell the pledged assets during the loan term only with the lender’s permission.
But that’s not likely to happen.
“The lender wants to ensure the assets remain available as security for the loan until it is paid off,” adds Shekhtman.
Terms can vary among lenders, so heed any restrictions and requirements for trading or selling the pledged assets.
Qualifications for a PAM loan
PAM requirements differ from other home loans. Since the lender is taking on additional risk with investments that can be inconsistent with highs and lows, the lender tends to be more selective in approving PAMs.
“Borrowers seeking PAMs typically need to have substantial assets and demonstrate their ability to manage those assets to be considered eligible,” says Shekhtman.
And many lenders have specific eligibility requirements, such as the following:
- Minimum asset value: The assets pledged usually need to meet a minimum value requirement set by the lender.
- Acceptable asset types: Lenders may restrict the types of assets they accept as collateral. Liquid assets like stocks, bonds, mutual funds, and sometimes other real estate may be eligible.
- Asset verification: The lender must verify the ownership and value of the pledged assets, which may involve the borrower providing documentation and statements.
The pros of a PAM loan
- You might not have to pay private mortgage insurance. Generally, PMIis required when a borrower makes a down payment of less than 20% of the home’s sale price. “But if the borrower uses assets to cover the down payment and reaches the 20% threshold, PMI may not be necessary,” says Shekhtman.
- You might get a lower interest rate. Using the assets as collateral demonstrates a lower loan-to-value ratio to lenders. “A lower LTV ratio signifies less risk for the lender, potentially leading to a more favorable interest rate,” says Shekhtman.
- You can help a family member buy a home. Pledged assets can assist another family member with their down payment. “These programs can facilitate a borrower obtaining 100% financing through a gift of funds from a family member,” says David A. Krebs, a mortgage broker atDAK Mortgage in Miami.
The cons of a PAM loan
- Your pledged assets may take a nosedive in the stock market. The lender periodically monitors your pledged assets, so if they decline significantly, it could trigger a margin call. “This would mean the borrower would need to pledge additional assets or cash to maintain the agreed-upon collateral value,” says Krebs. “If the borrower can’t meet the margin call, the lender has the right to sell the pledged assets to satisfy the margin requirement.”
- You could lose it all. The stock market can take a downturn that can profoundly affect your ability to make mortgage payments. And if the market completely tanks, you could lose your home (and the pledged assets) if you can’t make the mortgage payments and default on your loan.
How to find a PAM lender
It might be more challenging to find a lender willing to write a PAM compared with a traditional mortgage lender. So the key is to find a lender with vast knowledge of the criteria and considerations for PAMs.
“It’s critical to ensure the loan officer you’re dealing with has prior experience with this type of loan,” says Krebs. “These loans can have specific nuances, and an experienced officer can help avoid unexpected surprises near closing time.”
