Cryptocurrency has moved beyond the novelty stage and is increasingly accepted for transactions and investing; in fact, there are even crypto-backed mortgages. In mortgage lending, some mortgages are being collateralized by crypto assets rather than by the property itself. How do crypto-backed mortgages work?
Cryptocurrency defined
Currency of any type is a common medium of exchange by which people transact business to buy and sell goods and services, rather than using a clunky barter system. Historically, early forms of money were gold and silver coins, followed by paper money backed by gold and silver held in reserves. Now, worldwide, money is simply backed by “the good faith and credit” of the issuing government.
Cryptocurrency is a new type of money, distinct from traditional physical forms like coins or bills, as it exists in digital tokens on computer servers. Transactions are recorded in online ledgers using blockchain technology.
Cryptocurrencies are purchased through exchanges. Some investment brokerage firms can help you with crypto transactions.
How do crypto-backed mortgages work?
In a traditional mortgage, the borrower goes through a mortgage credit approval process. The borrower pays a certain percentage down, such as 20%, and then the lender pays the seller the remaining 80% of the purchase price. The borrower pays back the loan over time, and the house serves as collateral under a Deed of Trust.
Crypto-backed mortgages share some similarities but also have key differences. First, the borrower must have a cryptocurrency portfolio equivalent to the full loan amount. Second, the lender may not require a down payment at all, although the borrower can make one if he so desires. The borrower pledges a cryptocurrency account as collateral for the loan rather than the house. The borrower pays back the loan in regular dollars. In the event of default, the lender seizes the cryptocurrency account rather than foreclosing on the property. The lender will then liquidate the crypto account into regular dollars to recover the loan.
What you should know
There are important considerations with crypto-backed mortgages:
- You must have a portfolio of cryptocurrency equal to or exceeding the expected loan amount.
- You may not have to undergo as stringent a credit check as long as you have the loan value in cryptocurrency to pledge.
- Mortgage approvals are faster—sometimes as little as 2 weeks—compared to 1 month or more for traditional mortgages.
- Your crypto account will be held in an escrowed custody account and will not be available for transactions until the loan is paid in full.
- You may be required to have purchased the cryptocurrency at least 60 days before the loan application.
- There typically is no mortgage insurance premium on a crypto-backed loan.
- Acceptance is slowly growing among mortgage lenders, although many traditional lenders remain on the sidelines, awaiting a better understanding of crypto valuation. Those making crypto loans accept established currencies such as Bitcoin, Ethereum, USD Coin, and Tether.
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