Collateral Security
Definition and meaning of Collateral Security in real estate.
Collateral security is an asset or property pledged by a borrower to a lender to secure a loan, giving the lender the legal right to seize the asset if the borrower defaults. In real estate, the property being purchased serves as the primary collateral security for the mortgage.
In more detail
This pledge reduces the lender's financial risk, allowing them to offer larger loan amounts and lower interest rates to borrowers. If a borrower fails to make mortgage payments, the lender can initiate foreclosure proceedings to take ownership of the property and sell it to recover the outstanding loan balance.
In some cases, lenders may require additional assets, such as savings accounts or other properties, as extra collateral security for high-risk loans. The value of the collateral is verified before loan approval through a professional appraisal.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Required by | Mortgage lenders to approve home loans |
| Watch out for | Loss of the asset if loan terms are not met |
| Also known as | Collateral or security interest |
A bank approves a mortgage after confirming that the home's appraised value provides sufficient collateral security to cover the loan amount.
Frequently asked questions
Can you use land as collateral security?
Yes, raw land or developed parcels can be pledged as collateral security for a land loan, construction loan, or home equity loan.
What happens if the collateral is worth less than the loan balance?
If the property value drops below the loan balance, the borrower is considered underwater, which can complicate refinancing or selling the property.