Cross-collateral loans are primarily used in commercial real estate, but are growing in popularity in residential real estate. Cross-collateral loans in residential real estate are a financing strategy that allows a homeowner to use more than one property as security for a single loan. Instead of each property having its own separate mortgage, the lender ties multiple properties together under one loan. This is most commonly seen when someone already owns a home and wants to purchase another property without selling the 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. In practical terms, the lender places a lien on each property involved, meaning both homes are used as collateral for the same debt.

Essentially, this means that you’re using your equity in your current residence and also using the residence you’re about to buy as collateral. What generally happens is you use two properties to secure one short-term, interest-only loan, often for a period of six months. After you buy your new place, you then sell your old place, and when your old place sells, you use your equity in your old place as the downpayment for a new, permanent loan (usually a 30-year fixed-rate loan) that is secured only by your new property. This new 30-year loan then pays off the cross-collateral loan.

Cross-collateral loans are generally done using private capital, often using funds from just one party or individual. Since these are private funds, cross-collateral loans are nonconforming loans that cannot be sold on the secondary market. As a result, they are far less regulated than other loans, and therefore are much quicker to obtain.

In commercial real estate, cross-collateral loans are a way to leverage a business’ ownership of multiple properties to allow them to purchase another property, without having to sell their assets.