With an asset-based mortgage, the borrower secures the loan, reducing the lender's risk and eliminating the need for a traditional down payment, says Alex Shekhtman, CEO and founder of LBC Mortgage in Los Angeles.

Sound appealing? Read on to find out if you can leverage your investment into a new home.

What is a Pledged Asset Mortgage?

Pledged asset mortgages use assets like stocks, bonds and mutual funds, rather than income and credit qualifications, to qualify for a mortgage. So you may wonder: why doesn't the borrower sell some stocks and bonds to make the down payment?

It's simple: liquidating the assets could be subject to capital gains tax and there's no potential income from the investment. With a PAM, however, the borrower still owns the pledged assets and continues to earn income from the proceeds or dividends.

How does a PAM work?

A PAM is different from a traditional mortgage. Instead of making a down payment, the borrower deposits funds into the lender's pledged interest-bearing account.

Shekhtman explains that when assets are used as collateral, the borrower grants the lender a security interest in those assets for the life of the loan." This means the lender has a legal claim on those assets until the loan is repaid.

The borrower can still continue to earn interest or dividend income on the assets. And in most cases, the borrower can only trade or sell the pledged assets over the life of the loan if the lender allows it.

But that's unlikely to happen.

Lenders want to ensure that the asset remains available as security for the loan until it is repaid, Shekhtman adds.

Lenders' terms can vary, so be aware of any restrictions and requirements the lender places on trading or selling the pledged assets.

Assets.

PAM requirements differ from other home loans. Lenders tend to be more selective in approving PAMs because of the additional investment risk they are taking on, and the highs and lows of investments can be inconsistent.

Borrowers seeking a PAM typically need to have significant assets and demonstrate their ability to manage those assets to qualify for a PAM, Shekhtman says.

Many lenders have specific eligibility requirements, such as the following:

Minimum Asset Value: Secured assets usually need to meet a minimum value requirement set by the lender.

Acceptable Types of Assets: Lenders may limit the types of assets they will accept as collateral. Liquid assets such as stocks, bonds, mutual funds, and sometimes other real estate.

ASSET VERIFICATION: Lenders must verify the ownership and value of the mortgaged assets, which may require documentation and statements from the borrower.

You may not be required to pay for private mortgage insurance. Generally, private mortgage insurance is required when the borrower makes a down payment of less than 20% of the home's selling price. But if a borrower uses equity for the down payment and meets the 20% threshold, private mortgage insurance may not be required, Shekhtman says.

You may be able to get a lower interest rate. Using assets as collateral can show lenders a lower loan-to-value ratio.

A lower loan-to-value ratio means the lender has less risk and may be able to get a more favourable interest rate," says Shekhtman.

You can help a family member buy a home. Mortgage equity can help another family member with a down payment."

These programmes can help borrowers get 100 per cent financing through a gift from a family member, says David A. Krebs, a mortgage broker at DAK Mortgage in Miami.

Your pledged assets may plummet in the stock market. The lender regularly monitors your pledged assets and could trigger a margin call if the asset drops significantly.

Krebs says, "This means the borrower will need to pledge additional assets or cash to maintain the agreed collateral value."

If the borrower is unable to meet the margin call, the lender has the right to sell the collateral assets to meet the margin requirement.

You could be out of pocket A fall in the stock market could seriously affect your ability to repay your mortgage. If the market completely crashes, you could lose your home (and pledged assets) if you are unable to make your mortgage payments and default on your loan.

Finding a lender willing to underwrite a PAM can be more challenging than with a traditional mortgage lender. Therefore, it's critical to find a lender who is knowledgeable about the criteria and considerations of PAMs.

The key is to make sure the loan officer you're dealing with has previous experience with these types of loans," Krebs says. There may be some specific nuances to these loans, and an experienced loan officer can help avoid unexpected surprises near closing."