Mortgage for Home Ownership

Future Advance
By Julia Kagan
Updated March 24, 2021
Review by Ebony Howard
Fact checked by Yarilet Perez
What is a Future Advance?

A future advance clause is one in a mortgage contract that allows an additional source of funds under the loan contract. If a clause for future advances is included in a loan contract, the borrower will be able to rely on receiving funds from the lender according to the clauses of the contract without having to seek another loan to obtain additional funds. Future advance clauses may contain or not contain certain conditions that allow the borrower to be eligible to receive future advances.1
Important Takeaways

A future advance mortgage is an loan that's secured with the property or other asset.
Future advance mortgages allow additional funds to be transferred at a later date instead of making the loan at closing.
home equity loans as well as home equity line of credit (HELOCs) are two types of advance mortgages.
Future advance mortgages may be a problem for those who are unable to make required payments because collateral or property could be seized by the lender in the event in default.

Understanding Future Advance

Future advances are a consideration for a variety types of loan products. In general, the idea of revolving lines of credit is built on the expectation of having funds available to fund future advances. Future advance clauses can be added to non-revolving loans which allows customers to segregate the money they've been approved for to cut down on interest costs and manage cash flows.

If you take out a mortgage to purchase a house, the house itself serves as collateral to the loan. The future mortgage can include a clause that says that the property can be used as collateral to loans which haven't been approved yet. In effect, future advance mortgages create a lien or underlying debt obligation on the property prior to the issuance of any additional funds taken against it.2
Note

Future advances are not the same thing as a cash loan or payday advance.
Future Affirmation of a Mortgage

Home equity loans as well as home equity line of credit (HELOCs) are two popular examples of future advances. With an equity home loan the lender is lending you a particular amount of money based upon the equity you have in the home. This money is paid to you in a lump sum that you must repay with interest.3

Home equity lines of credit are revolving lines of credit that's based on your home equity accumulation. This kind of advance is most similar to credit cards in that you can use some of your credit line and when you pay it back, you can free up additional credit. Home equity lines of credit typically come with variable interest rates while home equity loans tend to offer fixed rates.3

As an example, suppose you have $100,000 of equity in your home. According to your loan-to value (LTV) ratio, your lender might allow you to borrow $50,000 from that equity via an equity line of credit. You'd then have to repay the home equity line of credit as well as your mortgage loan. You'd have a 10-year draw period during which you can draw money from the line and a 20-year repayment period that follows.

In defaulting on a home equity line of credit or mortgage equity loan may expose you to losing the home to foreclosure.
What is the use of future advances?

Future advances may allow you to withdraw additional funds from the loan. In mortgage lending, future advances could be used to fund the equity in your home loans or lines of credit. They may also be used as construction loans that are used to build a property that is the collateral for the loan isn't built yet. Future advances let you obtain the money you require today without having to modify the initial loan conditions.

Future advances also function in business settings. Businesses might also be eligible for term loans to finance the long-term growth of their business. A lot of lenders who work with businesses will structure future cash advances to be dependent on meeting certain milestones. Milestones may include meeting certain estimates for sales growth, revenue, or earnings.

Commercial lending contracts may allow for re-evaluation on credit terms, or for the broadening of principal balances in an undetermined amount. Commercial lenders can incorporate loan clauses that permit an evaluation to be re-evaluated after a certain duration of time. This provides incentives for customers to maintain their credit relationships with business lenders to potentially get additional funds from the same lender in the near future.
Revolving Credit Advances

In a revolving account the borrower is able to access funds up to a specified limit at any time. Revolving credit accounts are either a credit card or a lines of credit accounts. For each type of account the borrower is reliant on revolving the outstanding funds in the account, rather than receiving an amount of principal in a lump sum.4

Revolving credit accounts will also usually include provisions for cash advances. Generally, lenders will set the amount of cash advances for the account, which allows the borrower to directly withdraw cash for a small cash advance cost.

Consider the interest rate and fees that may apply when taking out an revolving credit advance.
Future Advances for Non-Revolving Credit

These clauses can be often included in non-revolving business loans. Companies may need future advance clauses to help with construction projects or ongoing capital investment projects. Businesses loans with future advance clauses could also be referred to as term loans.

Similar to a revolving loan account, the term loan will provide a borrower with a credit limit of up to. The borrower can rely on an approved principal amount from a specific loan product.

Construction companies will commonly use long-term loans with future advance clauses to obtain the funds they require at various times during the development of construction. Construction companies building in huge development complexes may be able to arrange future advance loans by incorporating certain conditions that permit the integration of real estate collaterals for individual areas of land when the construction process is completed.
FAQs
What Is a Future Advance?

Future advances are a clause in a loan contract that permits the borrower to obtain additional funds following the loan is disbursed. The future advances will be secured by collateral, which could include an asset like a house, business property or any other asset.
Is a Home Equity Loan a Future Advance?

The home equity loans and home equity lines of credit are both common examples of advances in the future. In either case the lender offers you money based on the equity value in your property. Future advances of either kind has its own loan conditions, and does not alter what was agreed upon in the original loan.
What happens if you default on an Future Advance?

A default on a loan in the future could lead to the lender taking control of the collateral that secured the loan. For instance, if you default on a home equity loan could put you at risk of losing the property to foreclosure.
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Related Terms
Signature Loan
The signature loan is a personal loan that banks and other finance companies that is based solely on the signature of the borrower and commitment to pay collateral.
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Collateral Definition, Types, & Examples
Collateral is a property that a lender accepts as security to extend an loan. If the borrower is in default and the lender is unable to pay, it can take possession of the collateral.
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Piggyback Mortgage
A piggyback mortgage could include any additional mortgage loan in addition to the first mortgage loan which is secured by identical collateral.
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Home Equity: What is, How it Works and How You Can Utilize It
Home equity is the measurement of a house's current market value less any liens that are attached to the home.
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What a home Equity Loan Works with Rates, Requirements, Requirements and Calculator
The home equity loan is a type of consumer loan that allows homeowners to borrow against the equity in their homes.
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What Is Revolving Credit, and how does it work? (With examples)?
Revolving credit is an arrangement that allows the account holder to take out loans repeatedly up to a set limit while repaying in installments.
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