How to Use Collateral to Purchase a Home

by Renae Nicole, Demand Media
    Putting up collateral is one way to ease a lender's mind when looking to purchase a home.

    Putting up collateral is one way to ease a lender's mind when looking to purchase a home.

    Buying a home is an investment most people dream of one day achieving. However, for some people, it’s not easy to do. After the housing market tanked in 2008, lenders haven't been willing to lend money as easily as they have in the past. While the lender almost always uses the home you're purchasing as collateral, there are instances when that is not enough. If your appraisal comes up short -- the asking price of the home is greater than its appraised value -- the lender may require a larger down payment or additional collateral. Collateral is essentially an asset you have of great value that you pledge as a condition of receiving a loan. If you fail to pay your mortgage loan, the lender can sell your assets to ease or erase the financial loss.

    Step 1

    Get an appraisal on the asset that will be used as collateral toward the price of your future home. Examples of assets commonly used as collateral include the home you are buying, land, bonds, or a home you already have paid off.

    Step 2

    Take the written and signed results of the appraisal to the lender. Include the appraiser contact information in case the lender wants to verify the information also over the phone or in person. Depending on the price of the house, the asset you pledge for collateral should be worth anywhere from 10 percent to 20 percent of the house’s value.

    Step 3

    Understand the risks that are involved with using collateral toward the price of a new home. If you default on the mortgage loan, you have the potential to lose all of your personal assets. Before putting your assets up for collateral, talk it over with a financial adviser. They can help you determine the risks involved as well as the odds of the loan being successful.

    Step 4

    Negotiate the loan to meet the commitments, such as interest rate and payment plan, that you are comfortable with. If you are wary about the loan, walk away from it and look elsewhere. You don’t want to struggle with a payment plan and risk losing your assets in the process.

    Tip

    • Never put valuables up for collateral without talking it over with loved ones that could also be affected by a potential loss.

    Warning

    • A bank that does not require any collateral may be more likely to charge very high interest rates.

    About the Author

    Renae Nicole has experience in various media markets, including Charleston and Myrtle Beach, S.C., as well as Savannah, Ga. She has been writing professionally for more than 10 years, working as a radio disc jockey, reporter/anchor for several TV stations and newspaper reporter. Nicole graduated from the University of South Carolina with a B.A. in broadcast journalism.

    Photo Credits

    • Thinkstock Images/Comstock/Getty Images