FEATURE
Allowing a Lender to Cross Collateralize Against Additional Property By Edward Brown, Pacific Private Money
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they are paid in full. For example, let’s say the bor-
rower owns a rental house that is worth $500,000 and there is a first mortgage in place for $200,000. The borrower wants to buy another rental for $800,000 and has $250,000 to put as a down payment. The
borrower asks a lender to loan the remaining needed $550,000, but the lender is not comfortable with the LTV [68.75%], so the lender asks what other real
estate the borrower owns, so it can cross collateralize its $550,000 loan. The borrower mentions the other
rental, and the lender decides to ask for crossing on
here are times when a lender is going to
In many cases, this cross collateralization may not be
in order to make a borrower a loan. The
er intends to pay the lender in full. The general plan
is not enough equity in the target property. Other sce-
at a point where a new lender does not require cross
Now, let’s say that the borrower receives an unso-
existing lender releases both properties; however, what
wishes to accept it. If there was no cross collateral
ask for additional [real estate] collateral most likely scenario for this is when there
narios include a borrower with less than stellar credit,
or the type or quality of the target property may not be enough to satisfy the lender to make the loan, as most lenders are more interested in making loans that will pay them back instead of facing foreclosures. For
this reason, the lender may ask the borrower to put up
additional collateral satisfactory to the lender so as to
give the borrower an incentive to avoid defaulting on the loan.
18 Originate Report | March 2019
something the borrower worries about, as the borrow-
is for the borrower to refinance the target property
collateralization, pay off the existing lender, and the happens when the borrower sells the crossed property,
or has the opportunity to refinance the target property,
and there is not enough to pay off the current lender who crossed?
The danger here is that the lender may hold up the
sale because it does not want to release their lien until
the first rental. Thus, the lender has lowered its risk because of the equity in the first rental.
licited offer for the first rental of $525,000, and he
against this property, the borrower could accept the offer, pay off the existing first of $200,000, and pocket the $325,000 remainder. However, because the rental has been crossed, the lender has $550,000 against the
property in second position. That means that there is technically $750,000 of liens showing up against the property. The borrower cannot accept the $525,000
