Homeowner Approach

Clearly the homeowner has the advantage in getting a credit consolidation loan if it is secured by their house. This has been a common form of financing up until recently as banks felt very comfortable producing loans protected by home values as collateral. However, when a housing market drops so does equity. And then banks stop lending via 2nd mortgages and similar.

The method essentially builds the consolidated debt either into the home mortgage, or it creates one new loan to replace the multiple smaller ones (i.e. a 2nd mortgage). Either way, when the house sells the consolidated loan secured by the house is paid first. The only way to avoid this is for the borrower to pay off the consolidated loan first so there is no lien against the house used as security. The sale doesn’t occur if there is not at least enough money in the purchase to pay off the remaining house debt and the 2nd mortgage.

Failure to pay the consolidated loan puts the secured house at risk since the bank will then eventually force a sale of the home to collect its outstanding loan.