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.