What Are The Differences Between An Asset-Based Loan And A Conventional Mortgage For Purchasing Investment Property?

One loan product that's commonly offered by investment property mortgage lenders is an asset-based loan. These loans are solely for people who are purchasing a home as an investment, regardless of if they're renting it out to tenants or selling it on the market after renovating it. They're a good option for investors who are having difficulty becoming approved for a conventional mortgage since they don't scrutinize your personal finances as much during the application process. If you're planning on purchasing an investment property, read on to learn about the differences between an asset-based loan and a conventional mortgage that you need to know about.

Approval Considers the Strength of Your Investment

The biggest difference between an asset-based loan and a conventional mortgage is the approval process. When you're applying for an asset-based loan, the lender will consider how strong your investment is. This is based on several factors. They'll account for average home prices in the area, how quickly homes move on the real estate market, and any renovations you plan to perform on the home. If you're planning to rent the home to a tenant, they'll look at average rent prices, the likelihood you'll find a tenant quickly, and the amount of experience you have renting out your homes.

Lenders will only approve an asset-based loan if they think that you're making a wise investment. When you're looking for a conventional mortgage, lenders don't consider investment potential as a factor — instead, getting approved for a conventional mortgage relies on your ability to make monthly payments.

However, since lenders for an asset-based loan are mainly considering the home's worth as an investment property, they don't look as closely at your finances as lenders for a traditional mortgage. This makes an asset-based loan a good option if you don't have a stable income since investment property mortgage lenders will often approve you based solely on if the home is a good deal.

Your Lender Can Receive Rent if You Default

Another important difference between asset-based loans and conventional mortgages is that the lender will be entitled to your tenants' rent payments if you default on the loan. With both types of mortgages, the lender will be able to foreclose on the home if you default, but asset-based loans take the extra step of seizing rent payments.

Since the foreclosure process can take a long time, this provides some extra security for the lender if you default — they'll be able to offset some of their losses with the rent payments. If you're looking for an asset-based loan, you won't be able to rely on your tenants' rent if you start missing your loan repayments and go into default.

Investment Loans Have a Short Duration

Finally, investment property mortgage lenders typically offer short-duration loans for property. A substantial number of the clients they work with are people who renovate homes and sell them quickly, so a short-duration loan product is what they need. If you're planning to rent out your investment property for a long period of time, you'll eventually need to refinance your loan into a mortgage that has a longer duration.

Overall, the biggest difference between an asset-based loan and a conventional mortgage is that lenders will strongly consider if you're making a wise investment when you're seeking an asset-based loan. This will make it easier for you to get approval for a loan if you have poor credit or don't make very much income, as your personal finances aren't considered as deeply as with a conventional mortgage. In addition, the extra scrutiny can help you avoid making a poor investment by pointing out factors you may have missed like structural damage to the home that would make it difficult to buy homeowners insurance.

If you think that an asset-based loan is the right choice for your purchase, find an investment property mortgage lender who offers these loan products and apply.