Summary:

When a Borrower approaches a lender, the conclusion is that there is insufficient equity to make the requested loan because the loan-to-value ratio of a trust deed on one property is too high.

A prudent lender would then question the availability of additional collateral that, when combined, may have sufficient equity.

A lender would record a security interest (trust deed) in one or more properties with sufficient equity.

The loan documents provide that if the Borrower defaults on the payment, the lender will foreclose on both properties.

The loan documents, escrow, closing statement, and title insurance will reflect the multiple properties.

Article:

One or both of these provisions may be necessary when encumbering two or more properties.

‘Cross-collateralization’ is not just a term; it’s a strategic move in real estate financing.  It involves encumbering more than one collateral asset, a strategic approach that allows recorded liens to be placed on multiple assets, usually fundamental properties.  While carrying a significant risk, as it can lead to the loss of numerous properties if the Borrower defaults, this strategic move can be a powerful tool in real estate financing, empowering borrowers and lenders with broader options and a sense of control over their financial decisions.

For instance, if a Borrower defaults on a mortgage for one property, the lender can declare a default on all other properties that are part of the cross-default provision.  This safety net ensures that the lender’s interests are protected, providing security and protection against potential risks.  A cross-default provision is a clause in the loan agreement that triggers a default if the Borrower defaults on any other loan with the same lender.

The Borrower's Loan Broker: A crucial player in the financing process, the loan broker acts as an intermediary between the Borrower and the lender, providing reassurance and guidance as the Borrower navigates the complex world of real estate financing.  The broker ensures that the Borrower feels supported and guided in their financial decisions, playing a key role in negotiating the terms of cross-collateralization.

The Borrowers loan broker presents the client’s loan requirements: My client needs a loan for $1,500,000.  He is willing to pay off his first $500,000 on his home and cross-collateralize a six-unit building with adequate protective equity. He needs cash to rehab the six-unit building and provide cash flow for another property to secure or entitlement for building another 4-plex.  He will refinance with institutional lenders upon completion and stabilization of rents.  This statement outlines the client’s financial needs and plans for the loan.

The loan falls into making a loan, encumbering their single-family owner-occupied home, and other income properties.  Since the loan proceeds are primarily for business purposes, the loan does not fall under federal and state consumer laws. This means that the Borrower may not have the same level of protection as they would under consumer laws.  Over 50% of the loan proceeds are for business purposes, not consumer purposes.  This distinction is crucial as it determines the regulatory framework under which the loan operates, ensuring the audience is fully aware of the legal framework in which their loan operates.

The lender will make a $1,500,000 loan, provided they encumber both properties with a cross-collateralized first deed of trust. This means the lender will have a security interest in both properties, and in the event of default, they can foreclose on both properties.  Since there is only one loan, there is no need for a cross-default provision.