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Pledged-Asset Mortgage

Mortgage Library: Types of Mortgage Loans: Pledged-Asset Mortgage

Pledged-Asset Mortgages, also referred to as Asset-Backed, or Asset-Integrated Mortgages, are specially designed for borrowers who have sufficient income to make monthly payments toward a home, but who have all their ready cash tied up in some sort of investments. Pledged-Asset Mortgages allow borrowers to capitalize on savings without spending them and avoid down payment requirements by pledging their financial assets. Depending upon the lender, you can use almost any type of an investment, including mutual funds or a stock portfolio.

Here's how a Pledged-Asset Mortgage works. You don't make a down payment, but pledge your assets instead. Let's say you want to buy a $100,000 home, and you have $20,000 in stocks, Certificates of Deposit, or any other type of investment. You can either cash in the investment and use that money for the down payment, or you can use the investment as collateral for the loan.

A Pledged-Asset Mortgage generally makes sense for people in a high income tax bracket. This sort of loan is an excellent option if the financial asset you are pledging has a higher expected rate of return than the interest rate on the mortgage, or when the assets you are pledging could cause you capital gains income tax grief if you were to convert them to cash. A Pledged-Asset Mortgage also makes sense for people helping a relative--or an extremely good friend--buy a house. You are still making money on your investments, and the person you are backing has a house.

Benefits of Pledged-Asset Mortgages:

  • You continue to own the investments that are pledged and continue to make any interest or profit that they generate.
  • In many cases the borrower can avoid having to take out mortgage insurance on the loan.

Disadvantages of Pledged-Asset Mortgages:

  • If you default on the mortgage, the lender gets both the assets you pledged as well as the house.
  • Keep in mind that since you are borrowing more money you are paying more interest than you would have paid if you had cashed in the investments and used that money for the down payment. You have to look at how much you are making on your investments and at how much you're paying in interest on the mortgage.

Fannie Mae's Pledged-Asset Mortgage Products

Fannie Mae's Pledged-Asset Mortgage products enable home buyers to borrow up to 100 percent of the sales price (or appraised value, if less) of a home when there is a pledge of a stable financial asset. Pledged-Asset Mortgages are fixed-rate loans, fully amortizing with terms between 10 and 30 years or adjustable-rate loans (available only when the pledged asset is greater than 10 percent and the borrower is making a contribution of at least 5 percent). Eligible properties are  single unit, owner-occupied, primary residences.

Fannie Mae offers the following three Pledged-Asset Mortgage products:

30 percent pledge -- This mortgage program requires that a family member pledge 30 percent of the unpaid principal balance on a 100 percent LTV loan. Mortgage insurance (MI) coverage is not required.

10 percent family member pledge -- This program allows a family member to contribute 10 percent of the original unpaid principal balance on a 100 percent LTV loan, provided that the borrower's income is less than or equal to 100 percent of the area median income, and the borrower contributes at least 3 percent to down payment and closing costs. Incomes greater than 100 percent of area median income are allowed provided the borrower contributes 5 percent or more for down payment and closing costs. Mortgage insurance is required.

10 percent self-pledge -- This program allows a borrower to pledge a minimum of 10 percent of the original unpaid principal balance on a 100 percent LTV loan. Mortgage insurance is required.

The pledged asset

The pledge may only be given by a parent, grandparent, brother, or sister eligible under the Fannie Mae gift policy or, in the case of the self-pledge, by the borrower. The pledge must be held as a certificate of deposit at a bank, credit union, or other depository. The account may earn interest, and interest may be paid to the borrower.

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