Asset-Based Lending: How ABL Facilities Work

Asset-depletion mortgages: turning a portfolio into income

Fannie Mae and Freddie Mac each allow verified financial assets to stand in for employment income. The lender subtracts your down payment, closing costs, required reserves, and any early-distribution penalty, then divides what is left by an amortization period to produce a monthly qualifying figure. Fannie generally uses 360 months; Freddie generally uses 240. Non-QM lenders compete by using shorter divisors, commonly 60, 84, 96, or 120 months, which produces a bigger monthly qualifying number from the same asset pool, at a price.

The arithmetic matters more than any marketing claim. On $1,000,000 of net eligible assets: a 360-month divisor produces $2,778 of monthly qualifying income, 240 months produces $4,167, 120 months produces $8,333, 84 months produces $11,905, and 60 months produces $16,667. That underwriting income then gets tested against your target mortgage payment and other debts, the same way W-2 income would be.

Fannie caps leverage at 70% loan-to-value, or 80% if the asset owner is at least 62. Freddie caps at 80% LTV. Both are limited to a primary residence or second home, not an investment property. Non-QM lenders such as Griffin Funding, North American Savings Bank, and Advancial Federal Credit Union run their own versions: Griffin advertises up to $3 million and a 620 minimum FICO with pricing 1.0 to 2.5 percentage points above conventional; NASB divides by 84 months and counts stocks and mutual funds at 70% of value; Advancial goes up to $5 million at max 80% LTV.

Property-based loans: the real "borrowing base" for real estate

For investment property, the equivalent of a borrowing base is a set of leverage tests applied to the deal itself, not your income: loan-to-cost (LTC), after-repair value (ARV), and loan-to-value (LTV). Best-advertised cases can reach 90% to 100% of purchase or cost, plus 100% of rehab dollars, but every dollar advanced is still capped by a hard 75% to 80% ARV ceiling. In practice, new sponsors see leverage closer to 70% ARV, while proven sponsors with a track record can push to 72.5% or 75%.

Rehab money is typically held back and released in draws after inspection, not funded in full at closing. A stabilized rental refinanced under a DSCR loan is measured differently again: rent divided by debt service, with lenders generally wanting at least 1.0x and pricing improving meaningfully above 1.25x, plus LTV up to about 80% on a purchase or rate-and-term refinance.

The appeal owners describe to us is the absence of financial covenants tied to trailing performance. A DSCR loan tests coverage once at closing rather than quarterly leverage ratios; a bridge loan tests the deal's collateral and exit, not your company's EBITDA. That is real, and it is why asset-based real estate credit moves faster than a cash-flow-underwritten business loan.

It is not covenant-free. Bridge and DSCR lenders typically require a bankruptcy-remote borrowing LLC, a personal guaranty at least for bad acts, insurance and draw controls, and a due-on-sale clause enforceable under the Garn-St Germain Act if you transfer the property or change entity ownership without consent. Miss a maturity date on a bridge loan and you are into default interest and extension fees, not a covenant waiver conversation, which is a different kind of risk than a leverage-ratio breach on a cash-flow facility.

Take an investor buying a $500,000 rental to renovate and hold. A bridge lender offers 85% of the $400,000 purchase price ($340,000) plus 100% of a $60,000 rehab budget, both capped by a 75% ARV test against a projected $620,000 after-repair value ($465,000 cap). Total advance: $400,000, comfortably inside the ARV cap, at 9.5% interest-only for 12 months with 1.5 points. Points cost $6,000 at closing; interest runs roughly $3,167 a month, or about $38,000 over 12 months if fully drawn the whole term. On completion, the investor refinances into a DSCR loan at 80% LTV against the new $620,000 value ($496,000), pays off the bridge balance, and pockets the spread, provided the rent supports at least a 1.0x DSCR on the new loan and the refinance closes before the bridge matures.

Skip it if you can qualify on ordinary income at a lower rate; asset-based structures almost always price above a plain-vanilla, fully documented loan. Skip a pledged-securities line if a market decline could force a margin call you cannot meet, since the lender can demand more collateral or liquidate your account with limited notice. Skip a short-term bridge without a funded, realistic exit; permit delays, contractor problems, or a soft refinance market can turn a 12-month bridge into an expensive extension. And skip counting an asset that is not actually accessible: retirement funds with distribution restrictions, pledged or encumbered accounts, and virtual currency are excluded or double-discounted under most published program rules.

Every one of these structures prices differently once you add points, reserves, draw fees, and exit costs to the headline rate, and the right one depends on the property, the timeline, and what you are actually trying to finance. If you are weighing a bridge against a DSCR takeout, or trying to work out whether your balance sheet supports better terms through a working capital facility instead, get in touch for a confidential conversation before you commit to a term sheet.