Real Estate Collateral
What’s the definition of real estate collateral?
Could we say it’s like keeping a hostage? No, that would be relatively insensitive. But the idea is similar. In real estate, collateral is a tool that diminishes one’s risk in a transaction. It’s about having something of value that belongs to the other party to “motivate” them to abide by the set rules.
Let’s discuss the real estate collateral definition a little further. When two parties are doing business of any kind, they need assurance that each party will do their part, right? That’s why a bilateral contract is made. When one party does not respect their obligations in real estate, meaning to keep up with payments, the party that gives the financial support suffers a loss. In such situations, collateral plays a decisive role. Collateral is an asset made available to a party when the other party fails to fulfill its responsibility.
In real estate, the collateral definition is more complicated because the real estate collateral is usually the asset for which the business is being done, the loan. That is, when someone asks a mortgage company for a loan to buy a townhouse, the townhouse itself usually becomes the collateral. Once someone defaults on the payments, the mortgage company can seize the real estate collateral and put it in foreclosure to recuperate the losses from the lack of payment on the borrower’s side.
The collateral value must meet or exceed the amount set for the loan.
Examples of real estate collateral
Taking out a mortgage allows the buyer to purchase a house and make monthly payments to the financial institution. The financial institution, however, needs a guarantee that the loan they have given to the buyer isn’t a lost fund. The financial institution needs to have a security blanket. This is what collateral is. In regards to mortgages, in particular, the collateral is the property itself. The house is the security for the investment that the financial institution makes in good faith to the buyer. If the buyer defaults on the mortgage, the financial institution will take ownership of the property to cover the expense of the loan they had given to the buyer.
Because the collateral must entice enough worth for the lender, another viable option for collateral when in need of a loan is a piece of land. If you want to purchase a house there are instances when the financial institution providing the loan accepts a piece of land as collateral for a secured loan. As not all loaning institutions accept land as collateral, you must make sure that the land has some value for it to be considered collateral. A given requirement is that you are the sole owner of the land.
Real Estate Advice:
Think of real estate knowledge as collateral: real estate agents got it! Contact one right now and have access to it so your home buying (or home selling!) process can be the best, most lucrative, less troublesome possible!
Popular Real Estate Terms
Outside wall of a structure that is exposed to the weather. An exterior wall can also be a load bearing wall ...
Provision in a contract that upon a certain occurrence or event the contract is canceled, An example is a contractual term that the written agreement is terminated if one of the party's ...
The accelerated cost recovery system is a depreciation system for tax purposes mandated by the Economic Recovery Tax Act of 1981. In 1986 the Accelerated Cost Recovery System (ACRS) was ...
A special agent in real estate is a real estate agent hired to do a specific task or job, as opposed to a general agent, who is a real estate agent who can do any task he or she is assigned ...
The company is not responsible to a third party if an account or financial instrument is dishonored by the debtor. The creditor's recourse is solely to the debtor's property. An example is ...
Expenditures incurred to initially purchase property, including incidental costs necessary to put the property into existing use and location. This cost is then depreciated over the assets ...
Funds that are retained in an account until a certain event occurs. For example, a downpayment on a contract held until full payment is received whereupon the holding funds are credited to ...
Potential homeowners buy land at a location they like and then build their house on it. ...
Property that is zoned for industrial use, including manufacturing, research and development purposes, factory office and warehouse space, and industrial parks. ...
Have a question or comment?
We're here to help.