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 has real legal implications for your rights and obligations as a homeowner or borrower. Overlooking the legal details of a real estate transaction can lead to costly problems down the road.
If you have questions about collateral, consider consulting a real estate attorney, especially if you are in a state that requires attorney involvement in real estate closings. A small investment in legal advice can prevent major headaches later.