Caveat loans provide credit with the equity of a property standing as security for the loan. Money is loaned from a lender with the caveat that the title of ownership of the property secures the loan.
How Do Caveat Loans Work?
Caveat loans are business loans that require security in the form of property or land. Loans can range anywhere from $1,000 to $50 million. The maximum amount of the loan however largely depends on the value of the real estate value of the person who is securing a loan.
Loans are commonly calculated as a percentage of the total value of the property – normally between 70% and 90%. However, some lenders will grant loans for the total value of the property.
Caveat loans, therefore, work like a second mortgage.
If you default on the loan, the lender will seize ownership of the secured property or the amount of equity that is available on the property. This will prevent the sale of the property or the use of the property to secure any other loans until the caveat loan has been repaid in full.
The financial experts from MaxFunding say, “one of the major benefits of caveat loans is that these are generally approved within a couple of days. This is a short-term loan with a period of between 1 and 12 months in which the full loan amount including interest should be repaid.”
Take note, though, that since this is a short-term loan, interest is charged on a monthly basis rather than annually. Also rates are usually much higher than other types of financing options for businesses.
What Are The Differences Between Caveat Loans And Second Mortgages?
A home loan or a first mortgage is a specified amount is provided by a lender that allows you to purchase a property. Approval is normally based on credit history, income and other qualifying criteria.
This property then serves to stand as security or collateral against the mortgage in the event that the borrower fails to repay the loan according to the terms and conditions of the mortgage agreement.
It is possible to take out a second mortgage on the same property. However, instead of the property securing the loan, the equity in the first mortgage is used as security. Equity is the amount that has been repaid on the principal amount of the original mortgage.
The key difference between a caveat loan and a second mortgage is how the loans are leveraged against the same property.
The mortgage that was assigned first takes priority over other mortgages that are taken out at a later date. In the event of non-payment of the second mortgage, it can only be dealt with once the first mortgage has been cleared.
In the case of a caveat loan, the secured property cannot be used as collateral for any other type of loan or finance while the caveat loan is in place.
A mortgage is a long-term loan (terms from 5 years to 30 years) whereas caveat loans are short-term (terms of under 1 year). Interest on a mortgage is charged annually whereas caveat loans charge interest on a monthly basis.
The following additional fees and charges may apply to a caveat loan depending on the lender:
– Application Fee
– Property Valuation Fee
– Legal Fees
– Line Fees
It is, thus, important to inquire what fees and charges will apply to the caveat loan. These fees should be included in the total cost calculation of the loan before making application. This calculation is essential to determining how much you can afford to borrow and repay.
What Can I Use A Caveat Loan For?
Caveat loans are aimed at providing financial flexibility to business owners and are commonly used for:
- Increasing cash flow
- Stock purchases
- Business rebranding
- Expansion and growth of the business
- Paying for incidentals or unexpected business expenses
Are Caveat Loans A Practical Financing Solution For Businesses?
If you are confident that a prospective buyer of the property that stands as security for the caveat loan will finalize the purchase before the term expires, then there is no reason why you shouldn’t take out a caveat loan.
However, if there is no buyer in place or you are using the loan as an exit strategy, you run the risk of not being able to meet the term and repay the loan in time.
It is however an option if your business needs a quick cash flow injection or if your require loan approval in a hurry.