Introduction
This topic contains information on borrowed funds secured by an asset, including:
- Borrowed Funds Secured by an Asset
- Secured Loans as Debt
- Reducing the Asset by the Amount Borrowed
- Documentation Requirements
Borrowed Funds Secured by an Asset
Borrowed funds secured by an asset are an acceptable source of funds for the down payment, closing costs, and reserves, since borrowed funds secured by an asset represent a return of equity.
Assets that may be used to secure funds include automobiles, artwork, collectibles, real estate, or financial assets, such as savings accounts, certificates of deposit, stocks, bonds, and 401(k) accounts.
Secured Loans as Debt
When qualifying the borrower, the lender must consider monthly payments for secured loans as a debt.
If a secured loan does not require monthly payments, the lender must calculate an equivalent amount and consider that amount as a recurring debt.
When loans are secured by the borrower’s financial assets, monthly payments for the loan do not have to be considered as long-term debt.
Reducing the Asset by the Amount Borrowed
If the borrower uses the same financial asset as part of their financial reserves, the lender must reduce the value of the asset by the amount of proceeds and related fees for the secured loan.
Documentation Requirements
The lender must document the following:
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the terms of the secured loan,
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evidence that the party providing the secured loan is not a party to the sale, and
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evidence that the funds have been transferred to the borrower.
Recent Related Announcements
There are no recently issued Announcements related to this topic.