The 5 C’s of Mortgage Underwriting – Collateral

There are two sides to every mortgage decision. One side is concerned with you the borrower. Are they financially stable? Can they afford the home? Assuming the answers to both of those are positive, are the circumstances that make it so likely to continue in the foreseeable future? The other side of the mortgage decision is concerned with what happens if what is likely is not what eventually happens. This installment of the 5 C’s series discusses that other side – Collateral.


When you obtain a mortgage to purchase a home you are putting the home up as collateral on the loan. Naturally, then, the lender will want some assurance that the home’s value supports the loan amount and that there is every expectation that it will be marketable in the future should they have to take possession and sell it.

The lender will order an appraisal report on the home to collect the information the underwriter needs to confirm the value, condition, and marketability of the home. It is important to note that the certified appraiser will be inspecting, evaluating, and reporting on more than just the value of the home. It is easy to think of an appraisal as little more than a piece of paper with an estimated value. In fact, it is a report with pages and pages of information on the home, the neighborhood, and the surrounding area.

The appraisal actually contains several different estimates of the value of the home, each calculated using a different method. The most important and widely-used of these methods determines the value by comparing the subject property to comparable homes in the area that have recently sold. Since every home is different, there can be no absolute apples-to-apples comparison, so adjustments are made, positive and negative, to account for differences between the subject and the comparable homes used. Most appraisal reports will use three or four comparable sales to develop an accurate estimated value of the home you intend to buy.

An appraisal can make or break your purchase. If the appraised value comes in significantly low it often results in the cancellation of the contract, which almost always includes a contingency that allows the buyer to withdraw under such circumstances. The maximum amount of the mortgage is always based on the lower of the sales price or appraised value. So, if the value is low, you would have to put down the required down payment plus the difference between the sales price and appraised value if you wanted to proceed. It is rare that a buyer is interested in paying more for a home than its appraised value.

On the other hand, the seller can agree to reduce the sales price, but they may have their own obstacles to overcome. First, they may believe the value is inaccurate and prefer to put it back on the market to attract a new buyer, who, in most cases, will get a new appraisal. Second, their own mortgage may not give them the room to lower the price to meet the appraised value without coming up with a significant amount of case themselves.

If you have any questions about obtaining financing to purchase a home, do not hesitate to contact me at your convenience. I am always available to help you achieve your goals.

Look for the companion articles to this one on my blog:

The 5 C’s of Mortgage Underwriting – Capacity
The 5 C’s of Mortgage Underwriting – Credit
The 5 C’s of Mortgage Underwriting – Capital
The 5 C’s of Mortgage Underwriting – Compensating Factors