cross capitalization

I’ve read about a technique called “cross capitalization” or “cross-collateralization”,but don’t fully understand how this works. Can someone explain this process? Is it like a piggy back loan (that you make monthly payments on)?

Cross collaterization is where is typically where a lender will use one piece of collateral for multiple loans that you have with them. For example, your lender decides to use your property as collateral for a car loan or credit card that you have with them and initiates foreclosure on the property because of your default on the credit card. I’m not sure if cross capitalization is the same thing.

Doston, thanks for the reply. Let’s say that I own a property with $100k in equity and I want to purchase 2 more properties each worth$100k. If I can 100% cross collaterize the first purchase against the equity I already have, can I cross collaterize the second purchase against the first purchase in which I have no equity yet?

To answer your question, no—you can’t leverage off leverage you don’t own or have rights to…


Scott Miller

P.S. You won’t be able to 100% cross collateralize either…
P.P.S. The other posters reference of cross collateralization is called a bridge loan—it when you use the equity in another property to securitize a position in another piece of property or multi-properties.

I’ve never heard of cross capitalization.

Cross collateralization has been more or less described already. It’s basically pledging an asset as collateral for a loan when the loan is being used to support an altogether different asset.

You can not usually use 100% of your equity as collateral, however.

Let’s say that the lender has a max LTV of 80%. You want to buy a property costing $100K, so you can borrow $80K. That leaves a $20K gap. You’d like to find a way to borrow the money.

Let’s also say that you own a $100K property with debt of only $60K. If the lender is comfortable with an LTV of 80%, that means you can still leverage that property an additional $20K, which coincidentally is the amount of money you need to buy the first property.

Your lender could cross-collateralize the new loan–for the full $100K–by taking a lien on both the new and the existing properties. You’re basically tapping the equity on the existing property to help finance the new property.

What you’re describing sounds like substitution on collateral; I’m not sure that is the same thing as cross collateralization - it probably is. As stated in the previous posts, you can’t use equity that you don’t have as collateral for another loan.