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Let's say I have 20% (or more) of the mortgage principal as shares in a mutual fund.

I could cash out the shares, pay my cap gains tax, and pay it to the bank as a down payment.

But is it possible/a good idea/feasible to secure the down payment with my shares? It would seem like a good idea because I would still be able to keep the money in the market, keep it growing, and not have to cash out / pay cap gains.

I understand that any arrangement like this would probably require me to maintain the 20% in the fund and if the fund's value dropped the bank could require me to put up additional collateral.

Still, the prospect is interesting, if it's even something that banks do. Is this a feasible endeavor?

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    you don't keep your money in the market. It's not your money. You give it to the seller of the property. You are basically asking if you can give 20% to a seller in mutual funds. – Vitalik Mar 8 '13 at 22:53
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    To reinforce Vitalik's comment, you pay the entire agreed-upon sale price (modulo various adjustments to protect your interests such as making sure the real-estate agent is paid and so will not have a lien on the house if the seller stiffs the agent, making sure the real estate taxes have actually been paid, etc) to the seller, borrowing some money (80% usually) from the bank and taking the rest from personal accounts (checking account, mutual funds, etc). So there is no securing of the down payment to the mortgage holder who never sees any part of that 20% – Dilip Sarwate Mar 8 '13 at 23:17
  • Have you considered taking out a loan using the shares as collateral to use as the down payment? They might poo-poo that idea, but depending on your local regulations it might be acceptable. – corsiKa Feb 11 '14 at 22:38
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The reason I don't know of any banks who would offer this to you (even if you held the investment account with their bank) is that there is no upside to the bank. It is a good idea for you, but what would they have to gain from this arrangement?

The reason banks require a down payment is underwriting quality. If you can afford a significant down payment, they know that there is a significantly lower chance that you will default. However, if you were to provide an investment account as collateral, you would receive all the upside, and any downside would reduce their collateral as a percent of the amount loaned.

This sort of idea could potentially work along the lines of a margin call (ie you have to provide additional capital if your asset value drops), but this would have the effective of leveraging the bank's risk, when their objective is to lower their risk through requiring a down payment. I don't see a reason why the bank would take on the risk that you would need to provide additional capital down the road with no upside for them. Additionally, many banks have backed away from the kinds of zero-down-payment and negative-amortization-ARM loans that got them (or the people they sold them to) in trouble over the last few years in an effort to reduce how much risk they take on.

I think that in theory, you'd have to offer a lot more benefit to the bank, and that in practice it's probably a non-starter right now.

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    You're using the phrase "security deposit". The bank doesn't get the 20%. They lend you 80, and have a lien on the house for that value. – JTP - Apologise to Monica♦ Mar 8 '13 at 21:01
  • You're right, "security deposit" is the wrong term. The 20% is a down payment which reduces the amount they would otherwise need to lend you. Edited my answer. – JAGAnalyst Mar 8 '13 at 22:49
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I've investigated this, and banks are willing to offer a deal similar to what you ask. You would take out a securities-backed loan, which provides you with the down payment on the property. For the remainder, you take out a regular mortgage.

JAGAnalyst wonders why banks would accept this. Simple: because there's money to be made, both on the securities-backed loan and the mortgage. Both parts of the deal are financially sound from the banks perspective.

Now, the 20% number is perhaps a bit low. Having 20% of the value in shares means you'd be able to get a loan for 50% of that, so only a 10% downpayment.

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  • Why would the bank only write a loan for 50% of the value of the underlying securities? Is 50% an exact or rough number? Which banks in the USA would do this? And, thanks! – Jeremy Mar 12 '13 at 2:52
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    @Jeremy: The exact percentage depends on the volatility of the securities. Google suggests that e.g. Wells Fargo would do this. – MSalters Mar 12 '13 at 8:30
  • Yes, but this is still an additional loan backed by the securities, and not securities in place of an additional amount loaned, which is what I think the OP is looking for. – JAGAnalyst Mar 12 '13 at 15:04

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