Cross-Collateralization

Cross-collateralization is a unique financial process that simplifies the collateral process for borrowers, but there are some things you should know before using this strategy. Find out more about cross-collateralization and learn how you can use it to your advantage as an investor.

Cross-collateralization is a process that allows you to use the same asset as collateral for multiple loans through a single lender. Normally, the collateral you’d use to secure a loan would only apply to a single loan — but cross-collateralization allows you to utilize one asset across multiple loans.

You can even secure unrelated loans with the same collateral in some cases. Plus, cross-collateralization makes it easier to apply for a loan and manage your loan until it’s paid off.

Cross-collateralization can play an important role in hard money loans because hard money loans are secured by collateral. Whether you’re using your primary residence or an investment property to secure a loan, you have to use assets as collateral to secure a hard money loan.

Some hard money lenders may allow you to use cross-collateralization to simplify your loans. You don’t have to use separate collateral for each loan you apply for, and you can take out several loans at once instead of using one asset as collateral for a single loan.

If cross-collateralization is something you’re interested in, make sure you talk to your hard money lender about whether that’s an option before you apply.

Cross-collateralization seems simple enough on the surface, but there are some key things you need to know. Let’s take a closer look at how cross-collateralization works and what you need to know before you apply for a loan.

When you’re applying for a loan, your lender may allow you to take advantage of cross-collateralization to use the same property as collateral for multiple loans — but how does that work?

Step 01:

Think about a mortgage loan and a home equity loan. You might take out a primary mortgage to purchase your home, making equal payments for a 15-year or 30-year period. Once you’ve built some equity in your home, you may decide to use a home equity loan to tap into that equity and put some extra cash in your pocket. These loans are both using the same property as collateral, which is an example of cross-collateralization.

Step 02:

Because you’re using the same asset as collateral, it’s important to note that each individual loan has an equal impact on that asset. If you’re using your primary residence as the asset with a mortgage and home equity loan, defaulting on either of those loans can result in foreclosure.

Step 03:

One important thing to keep in mind is that it’s up to lenders to decide whether to allow cross-collateralization. While some lenders allow it, many lenders don’t allow you to borrow money using an asset that already has a lien against it. Make sure you consult your lender before you apply for a loan if you’re planning on utilizing cross-collateralization.

Cross-collateralization comes in a few different forms, so let’s look at a few real-world examples of cross-collateralization and how it can impact your loans.

If you took out a traditional mortgage to purchase a home, you’re probably locked into a 15-year or 30-year loan. Each time you make your monthly payment, you’re increasing your equity in that property. Over time, you might build up enough equity that you can take out a home equity loan to pay for renovations or emergency expenses.

Since your home has a primary mortgage as well as a home equity loan against it, that’s cross-collateralization. You’re using one property to secure multiple loans, and you risk foreclosure on that property whether you default on your primary mortgage or home equity loan.

If you’re a real estate investor, asset-based loans might be a key part of your investing strategy. Asset-based loans make it easy for investors to secure the capital they need to invest in real estate, including commercial and residential properties.

Let’s say you have a primary mortgage against the property you’re trying to use as collateral. While some hard money lenders will allow you to use cross-collateralization to secure an additional loan, that’s not always the case. Finding a hard money lender who allows cross-collateralization is important if you already have an existing loan secured by your property.

Before you apply for a loan using cross-collateralization, it’s important to understand the potential benefits and consequences of cross-collateralization. While cross-collateralization is right for some borrowers, it can also land you in hot water. Learn more below.

Cross-collateralization often results in lower interest rates because you’re using a larger asset to secure the loan. You can also leverage your existing assets to secure a loan instead of having to use additional assets as collateral. The loan application and underwriting process can also be streamlined as a result of cross-collateralization.

There are also potential downsides to cross-collateralization. If you’re using the same property to secure multiple loans, defaulting on any of those loans can result in foreclosure. It can also be difficult to find a lender who allows cross-collateralization, which means it might take longer to secure a loan and start investing.