In private and hard money loans, real estate is the collateral used as security for the loan. Cross collateralization happens when more than one property is used as security on a loan. When one subject property does not have enough equity, the lender may be able to use equity in another investment property to make up the difference, in order to achieve the desired loan amount.
The cross may include more than 2 properties. There could be several properties used as collateral on one loan. However, when you get to 4 or more properties on a single loan, the common term for that is “blanket loan.” It’s sort of the same thing, but In most cross collateralization scenarios, there is one property which has most of the equity, and one additional property is crossed to make up a small amount of equity needed.
Example Scenarios of Cross Collateralization
Cross Collateral Scenario 1 – Cash Out Refinance 1st Liens
A cash out refinance is the most common loan type in which cross collateralization is used. For this first scenario, the borrower needs $500,000 for a non-real estate investment. She doesn’t have much liquid cash but owns two single family rental homes. Both are owned free-and-clear, meaning there are no mortgages on the properties.
To get the $500,000 the borrower plans to cash out equity on Property A which is worth around $700,000.
For an equity cash out loan, most private lenders max out at 65% loan-to-value. So Property A is only getting her around $450,000. To get the additional $50K, the borrower has to pledge Property B which is worth $300,000. When the loan is funded, the lender has a 1st lien on Property A, crossed with a 1st lien on Property B. The new private mortgage loan of $500,000 is secured by the 2 rental homes.
Cross Collateral Scenario 2 – Purchase 1st and 2nd Liens
For our next scenario, a real estate investor is in contract to buy a stabilized multifamily property for $2,000,000 and has 10 days to close. For a purchase loan, most private and hard money lenders max out at 70% loan-to-value. The borrower has to put down $600,000 but only has $400,000 cash in the bank and is $200,000 short.
He owns a small industrial property valued at $1,500,000 but it has a 1st mortgage of $700,000 from a local bank with a very low interest rate, and he is not willing to refinance it. The private lender is willing to cross collateralize his property in 2nd lien position to get that additional $200,000.
Once the loan is funded, the private lender has a 1st lien on the newly purchased multifamily property and a 2nd lien on the industrial property.
Crossing collateral is not something that all private and hard money lenders will consider. It mainly depends on the lender’s capital structure. If the lender sells their loans on the secondary market, the buyer may not want to have a 2nd property on the loan because it adds some complexity, especially if the cross is in 2nd lien position.
How to Find Lenders That Consider Cross Collateralization
If you’re looking for a private or hard money lender, use our website as a resource. There is no fee to search and no registration required. We have a filter you can use to easily find lenders that will consider cross collateralizing.
Once you’ve selected a loan type and entered a state or metro area, look for the Refine Results section on the left, then click Show Advanced Filters. Look for the field labeled Collateralize Multiple Properties, select Yes, then click the Apply button.
Click on each lender’s profile to learn about their guidelines, rates, fees and much more.