One of the first things a lender is going to ask you when you apply for a home loan is whether or not you own any collateral. Collateral is property or other assets that you own that you can use to offer the borrower as security for repayment of the loan. Having more collateral can increase your chances of getting the loan approved, and it can potentially have an effect on lowering your interest rate. The lender’s claim to your collateral is known as a lien. In the event that you fail to make the promised loan payments, the lender is allowed to seize the collateral to recoup their losses. When you use collateral to back your home loan, you are getting a secured home loan. These are often ideal for people who are not able to qualify for a regular, unsecured loan.
Secured vs. Unsecured Loans
Secured loans rely on your collateral to back your loan in the event that you are unable to make payments. Unsecured loans don’t have collateral, so they rely on your creditworthiness. Since there is no collateral to help minimize their risk of losing money, lenders have to be careful in whom they select to loan money to. Instead of relying on collateral, they rely on your creditworthiness, which is based on your credit score, to determine what kind of borrower you are.
Your creditworthiness determines what kind of rates you can get. Often times people with lower credit scores have much more success with getting secured collateral loans. This is because they are able to offer enough collateral to get approved for the loan and to get better interest rates.
What Types of Collateral Can You Use?
Collateral that can be offered can come in a variety of assets. The most common type of asset that is offered is the borrower’s home. This means if you are unable to make the payments for your collateral loans, the lender can take the necessary steps to foreclose on your home.
Vehicles may be offered as collateral. This can include more than just your car, you could offer your motorcycle, or watercraft (such as a boat) as collateral. Using a vehicle as collateral is not likely to secure as much money as a house would be able to.
Your savings account can be used as collateral if you are seeking a home loan from the bank in which you have the account with. This type of loan allows you to keep your cash in a savings account while allowing you to have the option of withdrawing cash or funding an item you may need. This is known as a savings-secured or a certified secured loan.
You can use your stocks and other investments as collateral. This is often known as a stock-based loan or a securities-based loan. The bank may extend credit to the full amount of the investment value.
Machinery and Equipment
Certain types of machinery and equipment may be used as collateral if it has a high value. Often times business owners can offer up machinery their business uses. For example, a construction company owner could use their excavator or backhoe as a type of collateral.
You may also use paychecks that you make in the future as collateral to secure a cash advance loan. This loan will allow you to borrow the money you need in advance, but you must pay it back as soon as possible.
How Does Collateral Affect Home Loans?
When mortgage companies are deciding whether or not to approve collateral loans, they were using a set of criteria known as the four C’s of underwriting: capacity, credit, cash, and collateral. When you submit your application and begin the home loan process, you must provide the borrower with all necessary documentation to prove your ownership of the collateral.
The loan request will then be processed and all documentation will be verified. The underwriter is the person who is responsible for determining whether it is an acceptable loan or not. If the loan is accepted, then you move into the closing process.
Collateral loans are one of the most popular types of home loans. They work very similarly to traditional loans, however, they use your asses as security. To help you find the right lender and loan, speak with a professional Fairfax mortgage broker for more information and for the steps needed to acquire a home loan.