by Phil Caulfield
A client asked me the other day, “How does a stock loan work?” A stock loan works differently than a mortgage loan, but can serve the same purpose of financing real estate.
Instead of real estate as collateral for the loan, the stock portfolio (bonds and other marketable securities can work also) serves as the collateral. Generally speaking, the amount you can borrow depends on the quality of the portfolio.
For example, a portfolio of highly liquid stocks, such as those listed on the S&P 500, will allow for a higher loan-to-value percentage, than a portfolio of thinly traded penny stocks. Loan-to-value percentages can be as high as 80%.
One of the most important details of how a stock loan works is that the lender will usually require that you move the portfolio of stock that you are borrowing against to their institution. You don’t have to move your entire portfolio – just the portion of the portfolio you are using as collateral.
Now that you know how a stock loan works, you may be wondering why someone would get a stock loan instead of a mortgage loan. Stock loans have many benefits.
Qualifying for a stock loan is based solely on the value and quality of the portfolio. Income, credit history, and property value play no role!
Is a stock loan an alternative to a stated income loan? Yes!
Is a stock loan an alternative to the old sub-prime loans? Yes!
Is a stock loan an alternative for someone who can’t refinance their mortgage because of a lack of equity? Yes!
Another benefit of how a stock loan works is speed. If you pretend that a stock loan and a mortgage loan were horses, you would bet on the stock loan winning the race 99 times out of 100! The reasons the stock loan horse wins is because there is no property appraisal and no credit underwriting of the borrower.
Another benefit of a stock loan is its flexibility. There are no loan amount limits. It can be used to finance any type of real estate, so it can be used for residential and commercial loans. It can be used to finance those properties that mortgage lenders won’t touch with a ten foot pole!
A huge benefit of how stock loans work is that they can be written as non-recourse. Non-recourse means that if the borrower stops making payments, the lender cannot recover other assets from the borrower if they fail to make the payments. They keep the securities, but that is it!
The payments on a stock loan are generally interest-only. An interest-only payment makes the payment lower than if it is amortized to be paid off in a certain amount of time.
Another benefit is that you are able to keep your portfolio the same. You may have been contemplating liquidating part or all of your portfolio to buy a piece of real estate. If you use a stock loan instead, you are able to continue to participate in the gains and losses, and you do not incur a capital gains tax that you may have to pay if you liquidate your stocks and/or bonds for the purchase.
Now that you know how a stock loan works, do you see any scenarios where it might work for you or your clients?
Phil Caulfield has been a mortgage originator since 1985, and specializes in jumbo loans, FHA, and purchase loans in California.
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