Financing Your Property with a Cross-Collateralization Loan

Many business owners looking to finance multiple properties will do so with a cross-collateralization loan, which involves taking out a new loan using equity in properties they already have. Cross-collateralization loans are most commonly made by private lenders, and are enough to finance at least two properties at once. You can do the same thing with a bridge loan, which you may have heard of, however cross-collateralization loans don’t involve a balloon payment that needs to be paid back in 18 months like bridge loans do, making them an ideal choice for people who don’t want the extra pressure.

Just as with any important financial decision, it is important to consider the benefits and drawbacks of a cross-collateralization loan before you decide to apply for one. This type of loan appeals to business owners who want a consistent, reliable source to finance multiple properties, instead out taking out multiple loans with multiple lenders. Because the extra security that having another property as collateral has, lenders are more willing to make the loan. The extra value of the other property may also give you a lower loan-to-value ratio (LTV) so you would potentially have a lower price on the loan. Despite these benefits, the biggest drawback to a cross-collateralization loan is what could happen if you are unable to pay it back. If something goes wrong for your business financially, and you have to file for Chapter 7 bankruptcy, you will be forced by your lender to give up your collateral property until you can pay off your debts.

To qualify for a cross-collateralization loan, you first need to have a property valuable enough to secure more than one loan. Lenders will typically allow you to take out this kind of loan so long as the amount has a 65% LTV of all the properties combined. While the DSCR requirement varies by lender, most will require yours to be at least 1.25. Lenders are also  more willing to give you a loan if you have experience owning and managing multiple properties.

For more information on cross-collateralization loans, check out the links below.

On what they are

On how they work

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