Legal
Collateral
An asset pledged as security for a loan, which the lender can seize if the borrower fails to repay. In a mortgage, the home itself serves as collateral. This is why lenders require an appraisal — they need to confirm the property is valuable enough to cover the loan if the borrower defaults. If you stop making payments, the lender can foreclose and sell the property to recover the debt.
Why It Matters
Collateral carries legal significance in real estate transactions. Property law, contract law, and lending regulations all intersect when buying a home, and terms like collateral have specific legal definitions that affect your rights and obligations as a buyer or homeowner.
While real estate agents and lenders can explain general concepts, for questions about collateral that could have significant financial or legal consequences, consulting a real estate attorney is worth the $200-$500 cost. In some states, attorney involvement in real estate closings is mandatory.
Real-World Example
Legal issues related to collateral can surface during title searches, contract negotiations, or closing. Catching problems early is far less expensive than resolving them after you've closed on the property.
Pro Tip
If you're buying in a state that requires attorney closings (CT, DE, GA, MA, NY, SC, WV, and others), your attorney will handle collateral-related legal matters. In other states, consider hiring one independently for a review of your purchase contract.