You may already know you can leverage your assets to secure funding for more opportunities. Still, with the right lender, there are multiple ways to achieve this, using cross-collateralized loans.
In this article, we’ll explore how cross-collateralization works, the benefits, and examples of the possibilities so you can determine whether this option is right for you.
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What is a cross-collateralized loan?
When a borrower purchases a single property with a mortgage, the collateral is tied exclusively to that property.
This means that the property serves as the security for the loan, and if the borrower defaults on the mortgage, the lender has the right to seize and sell the property to recover the loan amount.
Cross-collateralization operates in two main ways:
- Using a single asset as collateral for multiple loans
- Using multiple assets to secure a single, larger loan
The cross-collateralized loan helps you borrow more by giving lenders more security.
Combining the value of multiple assets can help you access larger loan amounts and better terms due to the reduced risk.
How does cross-collateralization work?
Let’s break down the processes for cross-collateralization.
Using a single asset for multiple loans
- You take out a loan and use one of your properties as collateral
- You need another loan someday for a new opportunity, and instead of finding new collateral, you use the same property for the new loan
- You now have two loans secured by the same asset
Using multiple assets for one loan
- You own several properties
- You need a large loan for a new opportunity and use your existing properties as collateral
- The lender evaluates the combined value of your assets and approves a larger loan
- You now have one loan secured by multiple assets
Cross-collateralized loans benefit lenders and borrowers because the risk is lower, and borrowers can access more money for future projects and investments.
Benefits of cross-collateralized loans
Cross-collateralized loans can open up a range of opportunities for real estate investors, helping these borrowers access more unique and lucrative investments than they may be able to otherwise.
These types of loans are best executed with a private money lender like Marquee Funding Group, which has experience structuring even the most complex lending scenarios.
Increased borrowing power
Whether you use the same property for multiple loans or several properties as collateral for a single loan, cross-collateralized loans can significantly increase your borrowing power.
In the first scenario, the higher collateral value can help you secure a larger loan amount than a single property could on its own.
In the second scenario, you can access more funds without needing a new collateral source.
Potential for better loan terms
More collateral means less risk for the lender.
Lower risk often leads to lower interest rates or more flexible repayment terms.
Financial flexibility
Private money lenders allow borrowers to use a variety of property types, including residential and commercial, to secure a loan.
This flexibility allows investors to take a more strategic approach to new opportunities, distributing funding in a way that best aligns with their financial goals.
Examples of cross-collateralization
Cross-collateralized loans can be structured in numerous ways for many types of scenarios.
Let’s look at a list of examples spanning a range of borrower situations.
Investors
- An investor owns several rental properties and wants to purchase another investment property, so they use the existing properties as collateral for a loan to buy the new property
Business owners
- A business owner owns two office buildings and wants to purchase a third, so they use the existing buildings as collateral to secure a loan for the third property
- A small business owner needs funding to expand their operations, so they use an existing property (or properties) as collateral for the new loan
Homeowners
- A homeowner has a significant amount of equity in their primary residence and also owns a vacation home, so they use both properties as collateral to get a loan for a major renovation project
- A homeowner is buying a new house but hasn’t sold their current home yet, so they use both the current home and new home as collateral for a bridge loan
At Marquee Funding Group, we pride ourselves on funding loans others won’t. Each of our loan officers is highly trained and capable of structuring mortgage options for even the most unique business and owner-occupied scenarios.
Take a look at our recently funded deals to see for yourself the types of scenarios we fund.
Potential risks and considerations for borrowers
Every loan scenario comes with its own risks and considerations for the borrower.
Talk to your lender to ensure you understand the risks unique to your specific situation.
The most common considerations for cross-collateralized loans include:
- Managing multiple loans secured by the same property or multiple properties can be extremely complex and requires accurate and detailed record-keeping
- You could potentially lose multiple properties if you default on the loan
- You must be able to thoroughly and accurately evaluate the risks of default and the potential impact on all collateralized assets
To mitigate these risks, find a private money lender you can trust to be a true lending partner.
Avoid over-leveraging a single property, and consider diversifying your investments to reduce overall risk.
A reputable lender will help you navigate this complex process with ease.
Is a cross-collateralized loan right for you?
If a cross-collateralized loan is perfect for your scenario, contact Marquee Funding Group today.
Marquee Funding Group is a full-service mortgage banking firm specializing in the origination, investment sale, and servicing hard money/private equity loans.
We fund all types of loans in both the consumer and commercial marketplace by offering access to borrowers who cannot find a source of institutional financing.
Our team can arrange debt on all types of real property.