Today, I want to talk about something that confuses a lot of people, substitution of collateral. It did me for many years. Collateral is the asset you pledge when you get a loan that if you don’t pay as agreed, they can take it away from you. Substitution of collateral is when a lender allows the borrower to transfer the mortgage that the borrower signed to another property that the borrower has that is of equal or greater value.
There are criteria that must be met in order of a substitution of collateral to take place.
- The borrower must have larger equity in another property
- The lender must approve the substitution. New collateral must be equal or more secure.
- A clause must be in purchase agreement stating the seller allows you to substitute collateral at any time during your agreement.
Why would a seller agree to a substitution of collateral?
If you can “walk the mortgage” to another property of higher value, the seller feels safer because they have a higher value collateral. By moving the mortgage you bought from the seller to another property you already own free and clear, it allows you to then sell that original property you bought and wind up with a lot of cash in hand. Just make sure you change the legal description on the note and mortgage.
What if you don’t have any free and clear properties?
What if you have a friend who owns a home free and clear? Ask them if you can move the mortgage to their property. If you’re willing to give up half of your profit to them in exchange for them letting you use their property, they might agree. Half of something is better than all of nothing.
This method will really help you build your wealth. Check out my website for all of the forms you’ll need to do a substitution of a collateral deal.