How Cross-Collateralization Could Secure a Much-Needed Loan

Hard money and bridge loans from private lenders tend to be easier to get than traditional loans from banks. But lenders still require something from borrowers. Take the down payment. Hard money loans usually come with higher down payment requirements. What if an investor does not have enough cash? One potential solution is cross-collateralization.

Understanding the benefits of cross-collateralization in a hard money scenario begins with knowing the role collateral plays in loan approval. For that, we turn to Actium Lending based in Salt Lake City, Utah. Actium writes hard money and bridge loans in Utah, Idaho, and Colorado.

Approval Is Based on Collateral

Unlike traditional banks, Actium and its fellow hard money lenders do not rely on borrower creditworthiness to make approval decisions. Instead, they look at what borrowers are going to do with the money. In most cases, the money will be used to obtain investment property or expand a business.

Actium recently financed the acquisition of a Preston, Idaho parcel that would ultimately be divided into individual building lots. Before approving the loan, Actium assessed the value of the property. Why? Because that property would be collateral for the loan. They ultimately made an offer based on the land’s value. The client accepted the offer and obtained the property.

Hard money lenders do not look at credit score, history, or income when making approval decisions. They look at the collateral value. Whether it is a piece of land being obtained by an investor or property owned by a business looking to expand its reach, collateral value is everything.

The Basics of Cross-Collateralization

Moving on to cross-collateralization, it is a scenario in which a borrower offers something that is distinct and separate from the current deal as collateral. Let us say an investor wants to purchase a piece of land that the lender doesn’t see enough value in. He might own another piece of land with more value, a piece of land already generating income. The lender could choose to accept that piece of land as collateral.

In such a case, the lender might file what is known as a blanket lien. The lien covers both properties: the one the investor is trying to purchase as well as the one he offered as collateral for the loan. Because both properties are included, there may be a bonus available to the borrower: he might be able to finance the acquisition of the new property at 100% because the two properties combined have a value that exceeds the total loan amount.

A Practical Scenario

Cross-collateralization is easier to understand with a practical example. So imagine an investor looking to purchase a piece of land at a price of $600K. A traditional bank is going to ask for a 30% down payment at bare minimum. Yet the investor has only $50K in cash. No bank is going to touch that loan.

Now imagine that same investor going to a hard-money lender. He still might not be able to get a loan with such a small down payment. But when he throws in an income-generating piece of property already in his portfolio, approval is easy. That property is worth $400K. Combined with the value of the new property, there is enough collateral to satisfy the lender.

Cross-collateralization lowers risk perception, which is something lenders appreciate. It makes writing a hard money loan that much safer. For borrowers, cross-collateralization opens the door to deals that would otherwise never get done. Of course, there are risks involved. So any borrower thinking of pursuing cross-collateralization should carefully assess all the benefits and risks.