Collateral Value We Dont Want the Property But We Do Want You to Want It

Except for a few predatory loan sharks (see Secret #82), lenders don't want your property. That's why most mortgage loans emphasize credit. As a means of last resort, lenders will foreclose, but they rarely expect to get their money back from doing so. Why then do most lenders require an appraisal of a property's value?

Appraisals protect against fraud. The lender checks to see if the property seems to be worth the price you're offering to pay. Without this check, scam artists can bilk mortgage lenders out of billions (as with the savings and loans in the mid- to late 1980s).2 The lender also wants to verify that you're committed to the property. Thus, the loan-to-value ratio. From the lender's perspective, the more cash you invest in the property, the less likely you'll mail the keys to the lender if times get tough.

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