When competition is stiff over a single home, a prospective homebuyer may want to present a solid cash offer that has no contingencies attached to it. That is among the reasons why securities-based loans have been growing in popularity as a viable tool, financial professionals say.
The trend began last year when the housing market was particularly hot. Increased demand and a limited housing stock made for fierce competition over homes. Many turned to securities-based loans as an option. This gives a person essentially direct access to cash to make a bid on a home that is not contingent upon receiving approval from a bank.
“A low supply in the real estate market is leading purchasers to want to make a strong cash offer,” said Jalina Kerr, managing director of client experiences for Schwab Advisor Services at Charles Schwab. “They want to have their offer stand out in a crowd.”
A security-based loan is approved using the assets an investor has in their after-tax investment account as collateral. These borrowing vehicles generally have lower rates than a traditional mortgage.
The trend began in earnest last fall and has continued this year, according to industry experts. While the competition over houses may not be as aggressive as it had been because of rising mortgage rates, potential home buyers have found other valuable uses for securities-based loans.
“We’re seeing it used mostly in the form of a bridge loan when one person is selling one property while purchasing another,” said Kris Maksimovich, president and founder of Global Wealth Advisors, which is based in Lewisville, Texas.
These loans are also a viable alternative to those who have been unable to secure a mortage when purchasing a home. Some individuals who might not have the cash in hand or credit to qualify for a mortgage.
Mary Mullin, a private wealth manager and managing director with Merrill Private Wealth Management, said that if a person is selling their home, they will be looking for those who can pay now over those who have conditions on an offer.
“If you go into a housing offer with conditions, you go to the bottom of the list,” she said.
Mullin has seen interest in alternative borrowing vehicles continue since last year. BofA has met the demand for these options as it not only offers traditional mortgages but a product called a loan management account (LMA). It allows the borrower to use the assets they have in their BofA account to borrow money.
Charles Schwab also offers a variety of securities-based loans and mortgages for its customers. And with the continued interest in these loans, Kerr said Schwab is making efforts to capitalize on the trend. The firm will sign a contract with a third-party digital provider in the coming weeks to help potential clients apply and manage their securities-based offerings.