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TYPICAL BORROWER

True asset based or "Equity based" lending is easier to obtain for borrowers who do not conform to typical lending standards.
  • They may have no, little or terrible credit.

  • They may have little income to support the payments, and may need to rely on the loan itself to pay back the lender until the property is either sold, refinanced, or their income resumes.

  • They may also have little or no down payment on a large commercial purchase transaction, as would otherwise be required, because they are buying it under value.

  • They may have struck a deal with the seller to lend them the remaining balance of the purchase price, not covered by the first position mortgage.



LOAN TERMS


Percentage of Appraised Value

Asset based lenders typically limit the loans to a 50 or 65 loan to value ratio or " LTV ". For example : If the appraisal is valued at $1,000,000.00 a lender might lend between $500,000.00 and $650,000.00.

A borrower is more likely to default with little or no down payment, and has little invested making it easier to "walk away" from the deal if it does not go well. In the event of a default resulting in a foreclosure, the First Lien position lender is entitled to repayment first, out of the proceeds of the sale. Exceptions may occur in the event of a "short sale", where the property is overvalued and actually sells for less, and does not cover the loan. The lender can than sue the borrower for the remaining balance if it can be obtained. An asset based lender knows that and usually will feel content that at an average 60 LTV they have enough equity to use to cover any expenses incurred in the event of a default.

These expenses would include:
  • Past due interest on the loan they have given

  • Past due property taxes on the property if the borrower has stopped paying them also

  • Lawyer's fees

  • Miscelleneous credit and collection fees associated with foreclosure.



Secondary financing

Allowing secondary financing is common on asset based lending programs. Asset based lenders may allow this, if they are content with the amount of equity remaining beyond their lien position (often first).

Some asset based lenders will allow a second mortgage from another lender or seller to occur up to the full amount of the properties value, while others may restrict secondary financing to a specific Combined Loan To Value or "CLTV". For example while they may lend at a 50 Loan to Value Ratio of the property value, they may allow secondary financing from another party for up to the full value, otherwise stated as 100 Combined Loan To Value Ratio .
They may in some cases require that the borrower have at least 5% or more of their own funds.. which would be expressed as a CLTV of 95. That would allow for up to 45% of the value to be financed by a secondary lender. The secondary lender is at a higher risk. A seller might take the chance in order to facilitate the sale of his property quickly and/or at full price.


SEE ALSO