Do the words “hard money loan,” “dragnet clause,” and “private lending” scare you? They should, but they can also save you a ton of money and time. These terms are features of cross-collateral loans, which can help an average loan consumer make a lightning-fast full-cash offer using only their equity in their current property as the downpayment. Of course, full-cash offers are delightful for sellers because they are less risky and close rapidly.
Cross-collateral loans also let you buy a new property without moving out of your current one, which is a convenience that cannot be understated. Does it sound fun to move out of your current home and into a temporary one while you wait for your primary residence to sell, after which you start searching for a new home? If this sounds appealing, you may have deeper problems that you should address.
Of course, there’s a third option… and that is the contingent offer, which is extremely boring for sellers unless they’re desperate.
If you don’t know what a cross-collateral loan is, prepare to have your mind blown. Maybe I’m just being dramatic for attention here, but these loans are pretty neat. Cross-collateral loans allow a homeowner to use their current property and the home they’re offering to buy as security for a single, short-term loan. That is, the home you own and the home you want to buy will be financed under the same short-term loan. This is a loan for someone who already owns a home with significant equity and wants to purchase another property without selling their current home first. Rather than taking out a completely separate loan with its own qualification process, the borrower leverages the combined value of both properties to secure financing for the new home.
After you buy your new place with the cross-collateral loan, you then sell your old place, and when your old place sells, you use your remaining equity as the downpayment for a new, permanent loan (usually a 30-year fixed-rate) that is secured only by your new property. This new permanent loan pays off the remainder of the cross-collateral loan.
Another significant benefit is that cross-collateral loans use “hard money,” which essentially means private funds. Using private funds allows your mortgage broker to give you a pre-approval rapidly, since they don’t have to complete all the underwriting paperwork required for bank-funded loans that must meet strict Fannie Mae guidelines. These private funds your broker has access to are often borrowed from individuals, which is why you avoid dealing with a bank that requires a lengthy Fannie Mae underwriting process. It is shocking how little paperwork these private loans require, so you do want to make sure you’re using a really good mortgage broker who can walk you through the process carefully and explain the risks clearly.
Cross-collateral loans are not without trade-offs and they do carry significant risk, so understanding them is important. Since multiple properties are tied together, if you default, there is a “dragnet clause” allowing the lender to seize all properties that secure the loan, so a default on just one property is a default on all properties under the loan. These loans are also short term, so interest rates are much higher. That said, they are typically interest-only loans, and you’re ideally only paying that interest rate for a few months. The risks are real and significant, but if you are confident your current home will sell within six months and will provide enough for a downpayment for permanent financing, the risk should be significantly dimininshed.
Overall, cross-collateral loans can be a powerful financing tool because of the lightning-fast approval and because they allow you to make a full-cash offer, even if you’re ultimately going to be switching to a 30-year mortgage. If you’re bidding in a competitive market and you don’t want to put the seller to sleep with a super unappealing contingent offer, then a cross-collateral loan from a mortgage broker you trust could be the right move.
Full-Cash Offer with Zero Cash
