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.

“Customers will be able to apply for these loans in a more streamlined fashion than they do today,” Kerr said.

She declined to name the company Schwab will be working with but she said a deal is imminent. Clients will be able to apply for a loan through this portal and make adjustments to it as well.

Not only does a potential home buyer want to make any offer without any conditions, they also want to be sure that they can provide the funds that the seller is asking. If there are multiple bids for a home and a person really wants that home, they will want to have access to a line of credit as soon as possible.

Mullin said securing an LMA takes no more than 48 hours. Most traditional 30-year loans take weeks depending upon the institution and a person’s cooperation. Kerr explained that a Schwab loan can take 10 to 14 days, while a standard mortgage can take up to 45 days.

“It’s much easier to get a securities-based loan than it is a mortgage,” said Dan Duca, associate director at Altfest Personal Wealth Management in New York City. "It’s less onerous than a mortgage.”

Duca said that he has been seeing the trend slowing down as of late after it had initially began getting hot in October, although he admitted he based that on a small sample size.  

Kerr has seen the opposite. In fact, she said that as more people start to learn about these loans and their flexibility, they are becoming a more attractive option, she said.

“We are starting to see an uptick of them on the retail side,” she said.

While securities-based loans have their advantages for short-term options when buying a home, there are disadvantages for using them as well. The primary one is their variable rates. The amount a borrower agrees to at the outset of the loan could change rather dramatically over the course of weeks and months, whereas a mortgages offer the option of a fixed rate.

In addition, if there are any dramatic changes made to the assets used as collateral, such as a person selling a portion of those assets or their value drops in a down economy, that could also force a margin call on the loan.

In terms of the type of client these loans are ideal for, there is no one-size-fits-all model and depends on individual cirumstances, Mullin said.

Maksimovich sees it as a viable option for business owners who are involved in an acquisition and do not want a long-term lending option.