Summary
Sufficient equity may be found by combining two or more properties
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 assess the availability of additional collateral that, when combined, would provide sufficient equity.
A lender would record a security interest (a trust deed) on 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, typically real property. 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 the lender’s interests are protected, providing security 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 Borrower's loan broker presents the client’s loan requirements: the client needs a $1,500,000 loan. 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 ato nd provide cash flow for another property to secure entitlements 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 loan plans.
The loan falls under the category of making a loan to encumber 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 the Borrower may not have the same level of protection as under consumer laws. Over 50% of the loan proceeds are for business, not consumer, purposes. This distinction is crucial because it determines the regulatory framework under which the loan operates, ensuring the audience is fully aware of the legal framework governing their loan.