What Does Value or Type of Collateral Not Sufficient Mean in a Home Loan?

what does collateral mean

A home that is in good condition and fairly priced usually is sufficient collateral.

If you're refinancing or purchasing a home, you might receive a comment such as: "value or type of collateral not sufficient" on a letter of denial from a mortgage lender. This means that after evaluating the home that will secure the mortgage debt, the lender has determined that it is not worth enough for the proposed loan amount. Because it can't justify lending you a higher amount of money than the home is worth or more than it can make off of a foreclosure sale, the lender can deny the loan.

Secured vs. Unsecured Loans

Consumers can obtain two types of loans: secured and unsecured. A home loan is secured debt, meaning that a specific asset secures its repayment and if you fail to pay, the lender can recover the asset. In contrast, most credit cards are a form of

unsecured debt -- the credit provider can't simply recover the money you owe by taking an asset from you. You pledge the home you buy, or the home you own in a refinance, as the asset -- or collateral -- for a secured home loan.

Real Estate as Collateral

Loan-to-Value and Equity

The home must meet the lender's loan-to-value requirements for a mortgage application to be approved. The LTV ratio, which is expressed as a percentage, represents the relationship between the loan balance and the home's value. A lender wants to finance as minimal an LTV as possible, as this mitigates its risk and potential losses. The LTV also helps determine a home's equity. For example, an LTV of 80 percent, which is standard and desirable from a lender's perspective, leaves 20 percent equity in the home. High-LTV loans, which are considered risky, have less than 20 percent equity.

When the Home Isn't Enough

Source: homeguides.sfgate.com

Category: Credit

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