Key Takeaways
- A crypto-backed loan allows you to use your crypto holdings as collateral to purchase real estate.
- Platforms offering crypto-backed loans will not bother you with your income or credit score.
- In most cases, you will be required to commit 100% to crypto for the value of the real property you are interested in. It won’t be necessary to sell your investment to buy property.
If you have a significant Bitcoin investment and have been dreaming about what to do with it, you could consider getting a crypto-backed home loan to purchase real estate. As crypto continues to find its space in the global financial market, there are lenders willing to offer loans against cryptocurrency for a real estate purchase. This article explains everything you need to know.
Most crypto owners may have used their crypto holdings to buy sandwiches, pay for video games, or make ATM withdrawals. If you’ve been yearning for something more useful to do with your big Bitcoin and Ethereum profits, you may want to consider using your digital assets as collateral for a crypto home loan! As cryptocurrencies are gradually joining the mainstream financial market, it’s now possible to spend crypto as collateral to buy real estate.
How to Use Bitcoin as Collateral to Buy a House
Traditional banking institutions have been skeptical about the crypto mortgage concept. Most are just beginning to understand Bitcoin, and those who do think it’s still too chancy. However, some decentralized finance (DeFi) platforms have tested the waters and are quickly bridging the gap as the demand for crypto-backed home loans increases.
Leveraging the power of your Bitcoin (or any other cryptocurrency), you can use it as collateral for buying your dream home. The best part about taking a home loan against cryptocurrency is that, unlike the traditional mortgage, your home remains safe since it isn’t part of the collateral. Your crypto home loan is also not the extended 30-year fixed-interest conventional mortgage. The relatively shorter loan term means you fully own your dream home faster.
When you take a loan against cryptocurrency, such as a crypto backed home loan, you’re required to stake at least twice the amount of value in Bitcoin. For example, if Bitcoin is trading at $100,000 and your dream home costs $200,000, you’ll have to place Bitcoin as collateral valued at $400,000. Crypto-backed home loans are over-collateralized as a result of Bitcoin’s high volatility. You and the lender don’t have to fret whether Bitcoin loses up to half of its value during the crypto home loan period. The loan terms have already considered such a possibility.
If the price of Bitcoin drops below the 50% mark in relation to the Bitcoin at stake during the loan term such that the loan-to-value ratio no longer fits, the liquidation becomes imminent. The lender is obligated to contact you in time, so you can both agree on the best action to avoid liquidation by selling off your collateralized Bitcoin to prevent further losses. In such a scenario, you can choose between refilling the Bitcoin to the correct loan-to-security ratio or choosing to repay the crypto home loan immediately.
Is a Crypto-Backed Home Loan Secure?
A crypto-backed home loan is not only easier to acquire than that time-consuming and costly traditional mortgage that’s weighed down with extra intermediaries. Blockchain’s trusted distributed ledger technology fully backs the crypto mortgage process. DeFi lending platforms rely on a decentralized and unbiased network of nodes that eliminate lengthy and excessive processing fees and a processing time of over 60 days. That means you can receive a crypto home loan in a matter of minutes.
Decentralized Finance platforms employ blockchain-based smart contracts that ensure the lender and the borrower agree to a fair and feasible agreement that includes repayment planning and proof-of-funds. Blockchain technology guarantees secure transactions for competitive crypto-backed loans in the absence of go-betweens and pricey lawyers.
How easy is it to get a Crypto Backed Home Loan?
Trying to apply for a mortgage using cryptocurrency as a deposit used to be an uphill task since only some of the traditional lenders would accept a Bitcoin-based deposit. Even if there were, chances are, there’s little guarantee that you would come across one that would offer you a great deal.
Traditional mortgage lenders don’t yet accept digital assets as a form of declarable income in their mortgage affordability checks. Because of its volatility, they may find it tricky to assess the risk levels. Other lenders still have trouble verifying the source of your cryptocurrency if it’s your primary source of income. However, as cryptocurrency moves from infancy to a good level of maturity, things are changing, and DeFi lenders are making what would have been impossible a few years ago a reality.
The Difference between Traditional Mortgage and Crypto Loans
While buying a home is a dream most people have, very few individuals can afford to buy their dream home in a lump sum. It wasn’t until the 1930s that financial institutions came up with a specific long-term loan designed for purchasing a home – a mortgage. The lender advances you so much money in taking a mortgage, and the home you buy becomes the collateral. In most cases, you put a down payment, and the lender gives you up to 80% of the cost you must repay with interest. Should you fail to repay the loan, the lender takes the home through a process called foreclosure.
The alternative is using your crypto holdings as collateral for a crypto-backed home loan to borrow to buy your dream home. The basic principles of a loan against cryptocurrency are similar to a mortgage loan in that you pledge to repay the loan over an agreed period. The main difference is that you still retain your home in the unlikely event that you’re unable to repay the crypto home loan. Unlike the traditional mortgage, you still retain ownership of your collateralized crypto. However, you lose the right to use the digital asset during the loan against the cryptocurrency period. Once your loan is paid up, you get back your collateralized digital assets, even when they’ve gained more value.
Conclusion
The process for a traditional home loan application can be tedious and filled with tons of paperwork, confusing fees, and a host of third parties that the borrower pays. DeFi lenders use blockchain technology to eliminate bank officers, brokers, solicitors, and other professionals from the process and their costs and inefficiencies. Anyone who owns a sizeable amount of cryptocurrency can try the peer-to-peer fully automated lending process for crypto-backed home loans and get to taste the difference.
