The millennial generation is officially making its mark on the real estate market. And not just because of the sheer numbers of millennials searching for homes, but because of the assets they increasingly use to obtain them.
Regardless of how you feel about it, crypto is a rapidly growing part of peoples’ portfolios. And as digital currencies rise in value and bolster the wealth of tech professionals and casual investors alike, the question arises of how to approach a real estate purchase when it comes to cryptocurrency holdings.
Many traditional financial institutions approach cryptocurrency with cautious skepticism. The mortgage industry is no different, though there has been a broad, albeit slow, acceptance of cryptocurrency ownership as a valid representation of a person’s wealth.
Using crypto to finance a home purchase or show it to mortgage lenders for asset verification to secure a loan is still uncharted territory. So the team at Prevu Real Estate undertook the effort of helping homebuyers get a clearer idea of how owning crypto plays out when pursuing a mortgage.
Traditional mortgage companies still prefer tried and true financial assets
It is becoming increasingly difficult to avoid a reality where crypto occupies a role in financial transactions.
Mortgage lenders have become privy to this, and some institutions in the industry have outlined how they handle buyers who want their crypto assets to be evaluated to get approved for a mortgage loan.
A good example is Freddie Mac, which released a bulletin in 2021 detailing how they approach buyers who own crypto. However, most of the rules limit how freely homebuyers can use their digital currency.
For example, any borrowers who receive income in cryptocurrency cannot use it to justify a loan. Cryptocurrency is also not considered when calculating assets to see if a borrower holds sufficient financial reserves.
This caution does not just stem from the volatility of crypto. Because crypto is essentially unregulated, there is a concern by primary and secondary mortgage market participants about the validity of the crypto and how the buyer obtained it. This means tracing the crypto transactions to ensure the currency was acquired legitimately, creating an extra hurdle for mortgage lenders.
The only concession that seems to be widely accepted is the liquidation of crypto assets into cash. Buyers can then use that cash to pay any mortgage fees, fund a downpayment, or show the converted cash as a financial asset during the mortgage underwriting process.
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Some lenders have officially adapted to cryptocurrency
Though crypto has been around for a reasonable amount of time, traditional mortgage lenders still prefer seeing tried and true assets, such as cash, bonds, or stocks, when evaluating a homebuyer’s financial strength.
But as the market changes and technology continues to push forward, modern mortgage lenders are developing financial services to help buyers apply for a mortgage exclusively through crypto. These new companies provide an unprecedented opportunity for aspiring homebuyers to leverage their crypto into physical assets, such as a home.
The products and services offered by crypto-friendly lenders will also vary how you make your monthly payments and what interest rate your loan wil have. Depending on the lender, interest rates can range anywhere from 3.9 percent to 7 percent or more.
Overall, the process differs from a traditional mortgage since crypto is a volatile asset. But homebuyers who want to use crypto to get a mortgage can do so, even though there are risks to look out for.
There are pros and cons to using crypto when securing a mortgage
Crypto fluctuates wildly. Though it is a welcomed asset for many who enjoy high-risk, high-reward investing, bringing it to a real estate transaction has pros and cons.
A crypto-mortgage lender that accepts Bitcoin, for example, will take it as collateral when funding your mortgage. However, suppose the crypto plummets in value. In that case, you will have to prop up the collateral with more crypto, potentially putting you into an uncertain position financially if a majority of your wealth is invested in cryptocurrency.
If you go the route of a traditional mortgage lender, you might have to liquidate your crypto for the lender to look at it as an asset. This can create a taxable event and may also cause you to lose out on potential profits in the future if the crypto value appreciates.
Conversely, crypto’s volatility can be a blessing in disguise. If you secure a loan via a crypto-lender, that crypto will be held as collateral towards the home's price. If the crypto you own skyrockets in value, your collateral is worth a lot more than it initially did, and you might have access to the surplus crypto, depending on which lender you use.
