Even if you’re keeping up with payments on your first mortgage, falling behind on a home equity loan or home equity line of credit (HELOC) can still put your home at risk. Many homeowners don’t realize that defaulting on a HELOC can lead to foreclosure, even if their primary mortgage is paid.
Because your property secures both home equity loans and HELOCs, your lender has the right to foreclose if you stop making payments. In many cases, you can also be personally liable for any balance left after the foreclosure sale, meaning your lender could still go after you for the remaining debt.
In this article, we’ll explain what happens when you default on a home equity loan or HELOC in foreclosure, so you know what steps you can take to protect your home.
Contact Denbeaux Law today for a free consultation with an experienced New Jersey foreclosure attorney who can review your case and help you understand what options are available to help you save your home.
Home Equity Loan vs. Home Equity Line of Credit
Both home equity loans and home equity lines of credit (HELOCs) are secured loans, meaning your home is used as collateral. The main difference is how they’re structured:
- Home Equity Loan: A lump-sum payment with a fixed interest rate and a set repayment schedule
- HELOC: A revolving line of credit that allows you to borrow as needed, usually with a variable rate.
Both a HELOC and a home equity loan can be subject to foreclosure. When they do, they are considered secondary, or subordinate, to your first mortgage. That means that for HELOCs and home equity loans in foreclosure, the first mortgage lender is paid off first from the sale proceeds, and the second loan is paid with any remaining funds.
Both are also typically recourse loans, which means the borrower is personally responsible for repaying the full balance. If the property value is less than what’s owed, the lender can go after personal assets to recover the remaining debt. In other words, you could lose your home and still owe money afterward. Because of this, defaulting on a home equity loan or HELOC can have serious consequences and can cause you to lose more than just your home.
What Happens When You Default on a Home Loan or HELOC?
If both loans go into default, it’s almost always the first mortgage lender who starts the foreclosure process. The second lender usually waits for that to play out rather than filing on their own.
If you’re keeping up with your first mortgage but have fallen behind on your home equity loan or HELOC, the second lender could, in rare cases, try to buy out the first mortgage and start foreclosure themselves to get their money back. That typically only happens when there’s a lot of equity in the home, because the first lender must be paid in full before the second lender sees any proceeds from the sale.
What Happens to a Home Equity Loan or HELOC During Foreclosure?
When a home is sold in foreclosure, the first mortgage lender gets paid first. The money from the sale is applied toward what’s owed on the mortgage loan, including any missed payments, interest, and legal fees. If there’s any money left after the first mortgage is paid off, it goes toward the home equity loan or HELOC. Because these are second liens, they’re lower in priority and often don’t receive full payment.
If the sale price doesn’t cover everything owed, the secondary lender can either forgive the remaining balance or try to collect it through a deficiency judgment. A deficiency judgment is a court order that allows the lender to come after the remaining balance by garnishing wages, freezing bank accounts, or placing liens on other property you own.
If you’re worried about a deficiency judgment, an attorney can help you negotiate the deficiency judgment with the lender or, in some cases, challenge the judgment in court.
HELOC & Home Equity Loan Foreclosure Consequences
Defaulting on a home equity loan or HELOC can have serious financial consequences. Because these loans are tied to your property, HELOCS or home equity loans with late mortgage payments can still trigger foreclosure, even if you’re paying your first mortgage.
And since these are recourse loans, the financial liability doesn’t necessarily end once the home is sold. If the foreclosure sale doesn’t bring in enough to cover what you owe, the lender can still come after you for the remaining balance, since you are personally liable.
A foreclosure also causes long-term damage to your credit. Missed payments and foreclosure records can stay on your report for up to seven years, which can make it harder to qualify for new loans, get rental applications approved, and even pass background checks for certain jobs.
There may also be tax implications if your lender forgives part of your debt. The IRS may treat that forgiven amount as taxable income, which can increase your tax bill for the year.
Because the impact can extend far beyond losing your home, it’s important to understand your rights and explore every option to prevent foreclosure with HELOCs and home equity loans. The sooner you understand your rights and get legal help, the more options you’ll have to protect yourself.
Working with an Attorney to Avoid Foreclosure with Second Mortgages
If you’re behind on payments or facing foreclosure, a foreclosure attorney can help you identify legal defenses and explore options to help you keep your home, even if you have a HELOC or home equity loan.
If foreclosure hasn’t started yet, an attorney can help you find ways to prevent foreclosure, such as applying for a loan modification, setting up a repayment plan, or identifying any mistakes or violations in the foreclosure process that could be challenged in court.
If the foreclosure process has begun, there are still options to save your home. An attorney may be able to pause or delay the sheriff’s sale, challenge the legality of the foreclosure, or defend you in court to settle the amount owed.
At Denbeaux Law, we’ve helped countless New Jersey homeowners defend against foreclosure, challenge servicing errors, and find solutions to stop foreclosure.
Contact Denbeaux Law today to schedule a free consultation and learn how we can help you save your home.
