Collateral is a common term in the lending industry, and it is a tangible item that a borrower pledges to secure their financial obligations. In the case of a home purchase, collateral may be an existing home, money in the bank or another type of property. The collateral is used by the lender to ensure that it is financially protected in the event that the borrower defaults. For example, you want to purchase a new home and find an ideal property. You may have less than perfect credit, and the lender is hesitant to loan you the money. You can use your existing property as collateral to secure the mortgage. In the event that you fail to fulfill your terms of the mortgage note, then you are in breach of contract, and the lender has the right to take your first home in order to satisfy the terms of the loan.