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If you plan to purchase a home using traditional financing, your lender will require you to provide mortgage collateral to secure the loan. In most cases, your collateral will be the asset you are financing.
How Mortgage Collateral Works
When you obtain a loan to purchase property, the mortgage serves as the lender’s interest in the property. Mortgage collateral is the asset that secures the mortgage loan. Traditionally, the mortgage collateral is the asset the loan finances. If you fail to make payments to your lender on the loan, your lender has the option to claim ownership of the property due to its security interest. This results in the lender's seizing the mortgage collateral. Mortgage collateral may be a house, mobile home, land, ship or other structure.
Transferring Mortgage Collateral
You may transfer your mortgage collateral to another individual only if doing so does not violate the lender’s security interest. If a lender prohibits the transference of mortgage collateral, a “due on sale” clause will be included in your original loan. Thus, when you transfer the asset, you must pay off the remainder due on the loan that secures the mortgage to release the lender’s security interest in the property. The asset remains collateral for the original mortgage even if you no longer own it. To prevent buyers from losing their property to foreclosure because it still serves as mortgage collateral on a previous loan, any money due to each lender financing the property is recorded on the property title.
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