What Is the Difference Between Collateral and Mortgage?
Applying for a mortgage can be just as overwhelming as it is exciting. Amongst the paperwork and meetings, you have probably run into terminology both familiar and foreign.
Understanding the loan process is crucial for making a sound financial decision - and it all starts with gaining a grasp of real estate vocabulary. The terms collateral and mortgage are often used alongside one another in the path to homeownership, but grasping their differences is the key to understanding how lenders evaluate loan applications.
Here is everything you need to know about collateral and mortgage, from how they differ and ultimately come together as part of the loan process.
Collateral vs. mortgage
Collateral and mortgage, while used in similar context, are not interchangeable terms. According to Experian, in the most basic terms, collateral is an asset. For large loans, lenders require some form of a safety net in the case the borrower is unable to make a payment or completely defaults. In the event the borrower becomes incapable of making payments, the lender can seize the collateral to make up for their financial loss.
A mortgage, on the other hand, is a loan specific to housing where the real estate is the collateral. When you take out a mortgage, whether it be from a commercial bank or private lender, one aspect they will always want to know the value of the home you are purchasing (the collateral). This can help them determine if their investment is too risky. Very rarely will a lender approve a mortgage larger than the value of the collateral.
Collateral is just one very important piece of what lenders are looking for when evaluating the risk of a mortgage - and ultimately whether they decide to accept or reject a loan application.
How do lenders determine collateral?
While lenders are experts in borrowing, they are usually not the authority on home values. To determine the true monetary value of the collateral for a mortgage, most lenders will rely on a professional appraiser, according to Investopedia. These real estate specialists will be able to evaluate a number of factors about the property to determine its value.
During a typical appraisal, a real estate professional will take an unbiased look around the home. They will inspect common aspects like the floor plan, appliances and square footage for the quality and aesthetic. They will also evaluate current market trends and the style and prices of similar houses in the neighborhood to estimate how much it could be sold for on the market. They will pass their appraisal on to the lenders to help them make their decision.
Some lenders will also want to know how much houses are selling for in the local area as well as recent tax assessments to get a full picture of the property value.
The 3 C's of a mortgage application
Of course, collateral is only one part of a mortgage. While lenders will want to know the value of the home you're purchasing, there are other factors they will take into consideration when deciding who to lend to.
InterContinental Capital Group has made mortgages as simple as possible, and part of that is helping borrowers understand what lenders are looking for. When applying for a mortgage, remember the 3 C's:
Credit - Your credit score is actually the first thing lenders will assess when determining your eligibility for a loan. It will paint a picture of your past borrowing and payment behavior to help lenders understand how you manage debt and if you're a reliable borrower.
Capacity - Your capacity is your ability to make your monthly loan payments. Lenders will look at a few key aspects - like your debt-to-income ratio - to calculate this aspect. They will also want to ensure you have a steady income.
Collateral - Your collateral is the value of what you're financing in comparison to the amount of the loan.
How collateral fits within our Triple C Guarantee
As you can see, collateral is a major component of a mortgage, but isn't the only factor lenders look for when reviewing a loan application.
Commitment to close
We close quickly and on time because our process is different than most lenders, meaning less surprises. While most lenders take over 30 days or longer to close, we are able to achieve the same in as little as two weeks. That's because we know the loan process inside out and share our knowledge with borrowers so they are able to prepare for their mortgage even before they apply.
Commitment to convenience
We offer a wide variety of innovative products, power by state of the art technology. This helps us evaluate market trends and find the loan terms that are most favorable for everyone involved.
Commitment to communicate
We have lenders all around the country who are experts in your local market. They are available to meet however and wherever is most convenient to you - whether it be through email, on the phone or even your local coffee shop. They can answer your questions and walk you through the loan process so you have a trusted friend along the way, not just a loan officer.
Being familiar with your local area allows lenders to be attuned to the current state of the market and regional specialties. This makes understanding the collateral component of the mortgage better for everyone involved.
Own It Home Loans are fast, painless and easy
If you've found a home you love or are under a time crunch, consider receiving your next home loan with Own It Home Loans. We pride ourselves on our Triple C Guarantee to streamline the loan process and get you moved in quickly.
Our local lenders are experts in your specific market and are just a phone call or email away to answer any and all questions you may have. Purchasing a new home doesn't need to be overwhelming with the right help. Contact us today to learn more about our lending process and get started on making owning your home a reality.