How would crypto-backed mortgages work for homebuyers?

It’s no secret that buying a home is expensive. Most homebuyers rely on mortgage lenders to help cover the cost. Lenders carefully review financial details like your salary, bank accounts and retirement savings to decide how risky it is to lend you money.

Earlier this summer, a directive from the Federal Housing Finance Agency instructed mortgage giants Fannie Mae and Freddie Mac to develop plans for including cryptocurrency as an asset in risk assessments for single-family home loans.

The agency’s director Bill Pulte said the decision came “after significant studying and in keeping with the President Trump’s vision to make the United States the crypto capital of the world.”

A crypto-backed mortgage means you use your cryptocurrency as collateral for your home loan. Instead of cash or traditional assets, your crypto holdings are pledged to the lender. If you default on the loan, the lender can liquidate your crypto to recover losses. This allows you to leverage your digital assets without selling them, but it also means you must already own cryptocurrency like Bitcoin, Ethereum or other accepted cryptocurrencies to qualify.

Bitcoin is a form of cryptocurrency — a digital currency that exists only online and is not issued by any government or bank. Traditional currencies like the U.S. dollar, euro or Canadian dollar have physical bills and are issued by national authorities. While cryptocurrencies operate outside traditional financial systems, governments around the world do regulate them to varying degrees.

Bitcoin transactions and ownership are tracked using a public digital ledger called the blockchain. This blockchain is decentralized, meaning it’s maintained by a global network of computers rather than a single entity.

Ethereum is one of thousands of digital platforms and currencies. While Bitcoin and Ethereum are the most widely known, there are many others including stablecoins, which are digital currencies pegged to traditional assets like the U.S. dollar or gold and are increasingly offered by banks. These, too, can sometimes be used as assets in crypto-backed mortgages.

“The idea of crypto-backed mortgages is that you’re showing your ability to repay by showing your holdings of cryptocurrency, which ... can be an important source of your overall wealth,” Brad Case, chief residential economist at Homes.com, said in an interview.

When you apply for a mortgage, you need to demonstrate your ability to repay the loan. Traditionally, this involves providing documentation of your income and assets, such as cash, stocks or bank accounts.

With a crypto-backed mortgage, you use your cryptocurrency holdings — like Bitcoin or Ethereum — as part of your assets. You present these holdings to the lender as evidence of your financial strength.

The lender assesses the value of your crypto portfolio, much like it would with stocks or cash. However, as Case notes, crypto is more difficult to document and verify, which adds complexity to the process.

“The problem with crypto is that it is designed to make it possible to evade documentation," Case said. "There aren’t third-party sources of information on your crypto holdings. ... The whole point is to make sure that nobody can find out what your crypto holdings are, except you.”

When people use cryptocurrency, every transaction is recorded on a public network called the blockchain. Anyone can see how much crypto is moving between different accounts, but those accounts are a string of letters and numbers but no real names.

However, authorities can sometimes trace ownership by following transactions and using legal tools like subpoenas to connect assets to individuals, especially when crypto is converted to cash or used with regulated exchanges.

If you do get a home loan, you have to pledge your crypto as collateral. It is typically held by a third-party custodian for the duration of the loan.

With a crypto mortgage, your monthly payments function just like they do with a traditional mortgage: You repay the amount you borrowed, plus interest, over time. Your crypto is held until you pay off the loan: You can’t use or sell your pledged crypto while the loan is active.

Crypto assets are considered riskier because their value can fluctuate dramatically, making it harder for lenders to assess long-term stability. This volatility means you may need to add more collateral if prices drop, and it’s one reason why interest rates on crypto-backed mortgages are often higher than those for traditional loans.

It's worth noting if the value of your crypto asset falls due to a price drop, the lender might ask you to add more crypto to keep the loan safe. If you can’t, they might sell your crypto to cover the loan.

According to mortgage broker LendFriend, interest rates are much higher — 9 to 10% more than what you’d pay for a regular mortgage.

That's because lenders and investors view those who use cryptocurrency as collateral as riskier than those who use traditional assets, Case said. Even if two borrowers have the same amount of wealth, the one with crypto is considered a higher risk.

As Case puts it: "It depends on how much the crypto increases the interest rate on your mortgage. The higher the interest rate in your mortgage, the higher your payments are, and the longer it will take you to build up equity in your house, " Case said. "It should reduce slightly the pace at which you gain equity.”

This type of mortgage lets crypto owners buy property without selling their digital assets. It’s especially appealing if you believe that your crypto will gain value over time. However, crypto prices can fluctuate dramatically, so lenders will likely require a substantial amount of collateral. Sometimes you’ll need to pledge crypto worth as much or more than the home’s purchase price.

Some lenders may offer a blended option, where you contribute part of the down payment in cash around 20% and use your crypto as additional collateral. This setup can help you qualify for better terms or borrow a larger amount.

“The benefit is that you make it possible for more people to buy houses that wouldn’t necessarily be able to qualify," Case said. "You make it easier for anybody who owns cryptocurrency, and therefore possible for some who wouldn’t otherwise be able to do it.”

A crypto-backed mortgage differs from a traditional home loan in several ways:

• Collateral: With a standard mortgage, your home secures the loan. With a crypto-backed mortgage, your digital assets take that role. The lender typically holds crypto equal to the loan amount, so your crypto, not your home, is at risk.  
• Down payment: Conventional loans usually require a cash down payment of 3% to 20%. Crypto-backed loans often don’t require any cash upfront since your crypto serves as the collateral.  
• Credit and income verification: Traditional lenders rely heavily on credit scores and proof of income. Crypto lenders tend to base approval on the value of the crypto portfolio instead. Some lenders could even skip credit and income verifications entirely. Case notes that this can be risky for the lender, because credit checks help them spot borrowers who might be more likely to default. Without a credit check, the lender is relying entirely on your crypto holdings as proof you’ll repay the loan.  
• Closing time: Standard mortgages can take 30 to 45 days to finalize due to appraisals and documentation. Crypto mortgages usually close faster — sometimes in one to two weeks.  

Case adds that credit reporting agencies may view holding cryptocurrency as a sign of being less trustworthy, since crypto is sometimes associated with riskier financial behavior. So, even with crypto collateral, your credit score can still affect your mortgage terms.

You can’t use it directly for a traditional mortgage, but you can sell it and use the cash. You’ll need to deposit the money into your bank account first. According to the National Association Realtors, about 1% of homebuyers, including first-time buyers, use money from crypto sales to fund their down payments.

Lenders, however, may have strict rules about verifying the source of these funds. You’ll need to show that you owned the crypto for at least 60 days before selling it. If you can’t show that, the money usually needs to sit in your bank account for at least two months before the lender will count it as eligible funds for your down payment.

Crypto mortgages can be appealing, but they also carry serious risks, especially when it comes to market volatility.

Big price swings: Crypto prices can rise or fall fast. If the value of your crypto drops, your lender might ask you to add more collateral, or they could sell some of your crypto to cover the loan.

You can’t sell your crypto: While your crypto is tied to the loan, you can’t sell or move it. To free it up, you’d have to pay off the mortgage or replace it with other collateral.

Higher interest rates: Because these loans are riskier, they often come with higher interest rates than regular mortgages.

Lender problems: Your crypto stays locked with the lender until you pay off or refinance the loan. If the lender goes bankrupt, merges with another company, changes ownership, or shifts its business model, accessing your collateral could become complicated.

No government protection: Crypto mortgages aren’t backed by federal programs or insured by the Federal Deposit Insurance Corporation. If something goes wrong, you’re on your own.

“The crypto industry is looking to be regulated by the Commodity Futures Trading Commission instead of the U.S. Securities and Exchange Commission," Case said. "The U.S. Securities and Exchange Commission takes fraud very seriously, and they put in very strong safeguards against it. The Commodity Futures Trading Commission doesn’t have the same level of regulatory strength.”

And since the lender sets their own rules, always read the fine print carefully. Make sure you vet your lenders because there can be scams in the crypto space.