Collateral (Part 2 of 4)
This set of 4 videos will give you a super quick overview of the 4 C’s of Real Estate Financing: Credit, Collateral, Capital, and Capacity. Take a look! Please contact me if you have any real estate questions.
In real estate financing, collateral is the “C” concerned with the property itself. Appraisals are a direct result of this “C”. Most people don’t give a lot of thought to an appraisal – it’s a valuation of a property and it lets you know that you didn’t overpay for a property. But that’s not really it. It’s actually a tool the bank uses to make sure that they’re lending an appropriate amount of money on a given property – they do this to protect their financial interest in the property. If the lender makes a loan at 90% ($270,000) on a $300,000 property, then they should have a $30,000 safety net if something happens. But if the house is only worth $265,000 and they need to foreclose, they’re going to lose money (so are you, by the way). And that’s not what banks like to do. So they protect themselves by ensuring that the home is actually worth what they’re basing their loan on.
Real Estate Financing – Collateral