What Happens to Home Equity Loan in Foreclosure?

Introduction

Foreclosure can be an extremely difficult and stressful experience for homeowners. If you have a home equity loan or home equity line of credit (what happens to home equity loan in foreclosure) on your home that is facing foreclosure, you may be wondering what happens to home equity loan in foreclosure and how it will impact you financially. Here is an overview of what generally happens to a home equity loan during the foreclosure process and your options.

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How Foreclosure Impacts Home Equity Loans

A home equity loan is a type of loan that uses your home as collateral. When you take out this type of loan, the lender places a lien against your home. If you default on the loan, the lender has the right to foreclose on the home to recoup the money owed.

During a foreclosure, what happens to home equity loan in foreclosure, there are a few potential outcomes for your outstanding home equity loan balance:

The home equity loan will need to be paid off first before any other mortgages on the home. The lender has first claim and must be fully repaid before any remaining proceeds are distributed.

If the home sells at auction for more than what is owed on the home equity loan, the excess proceeds will go toward paying off your primary mortgage and any other liens on the property.

If the home sells for less than what is owed on the home equity loan, you will still be responsible for repaying the remaining loan balance. This is known as a deficiency judgment.

The lender may be willing to work with you to modify the loan terms or settle for less than full repayment of the loan. This depends on your individual situation.

Repayment Options if Loan is Underwater

In many foreclosure cases, the home equity loan ends up “underwater” – meaning the home sells for less than the total amount owed on the loan. This leaves you with a remaining balance that you are still responsible for paying back to the lender.

If this happens, here are some potential repayment options:

Work out a payment plan with the lender to pay back the deficiency judgment over time. The lender may be willing to settle for less than full repayment.

Take out a personal loan to pay off the deficiency judgment quickly rather than making payments over an extended period.

File for bankruptcy. This may allow you to discharge or eliminate the remaining home equity loan debt that wasn’t repaid by the foreclosure sale proceeds.

Simply default on the remaining balance. This will severely damage your credit and the lender can take other legal actions to recover the money such as garnishing wages or putting liens on other assets. Generally not recommended.

Timing of Home Equity Loan Repayment

The timing of when your outstanding home equity loan balance must be repaid depends on several factors:

State laws – Some states have specific laws regarding foreclosure of home equity loans that impact timing.

Type of foreclosure – Repayment timing may vary depending on whether it’s a judicial vs. non-judicial foreclosure.

Loan terms – The original terms of the home equity loan will dictate repayment requirements.

Lender policies – Each lender may handle repayment timelines differently.

In general, you will likely receive notice from both your primary mortgage lender as well as your home equity loan lender during the early stages of what happens to home equity loan in foreclosure. This gives you a heads up on their repayment expectations. Don’t ignore these notices as it could impact your options.

Impact on Credit Score

Foreclosure alone will cause significant damage to your credit score. Defaulting on a home equity loan in addition to your primary mortgage will cause further damage:

Foreclosure can drop your credit score by anywhere from 100 to 300 points.

Your credit report will show the foreclosure as well as any remaining balances owed. Both severely impact your creditworthiness.

The foreclosure can stay on your credit report for up to 7 years. The remaining balance owed could be reported for up to 6 years.

It will be very difficult to obtain new financing for several years due to the impacts on your credit.

Steps to Take if Facing Foreclosure

If you are facing what happens to home equity loan in foreclosure and have an outstanding home equity loan, here are some key steps to take:

• Contact both lenders immediately – Let them know your situation and see if they are willing to work with you to avoid foreclosure. The sooner the better.
• Consider loan modification options – Inquire if the lenders are willing to modify the loan terms to make repayment more affordable.
• List the home for sale – Selling the home voluntarily may allow you to avoid foreclosure and use the proceeds to repay your loans.
• Explore bankruptcy – Filing for Chapter 7 or Chapter 13 bankruptcy may help stop the foreclosure process and eliminate some debt.
• Seek housing counseling – Nonprofit housing counselors can help assess your options and negotiate with lenders.

Options to Avoid Foreclosure

If you are facing the possibility of foreclosure, here are some options that may help you keep your home and avoid foreclosure:

Reinstatement – Paying the total amount past due on your mortgage and home equity loan to bring them current.

Forbearance – Your lender temporarily reduces or suspends payments for a short period of time.

Repayment plan – Your lender may agree to let you repay the past due amount over several months in addition to your regular payments.

Loan modification – Adjustments to the mortgage terms such as interest rate, payment, or loan balance to make it more affordable.

Short sale – Selling your home for less than the total amount owed on the loans.

Deed in lieu of foreclosure – You voluntarily transfer ownership of the property to the lender.

If you are proactive and explore these options right away, you may be able to avoid foreclosure and the significant financial consequences.

Conclusion

Losing your home to foreclosure can be emotionally and financially devastating. Having an outstanding balance remaining on a home equity loan after foreclosure only makes the situation more challenging. Understanding what happens to home equity loan in foreclosure, repayment options, steps to take, and consequences can help you make the most informed choices during an already difficult circumstance. 

Being proactive and exploring alternatives to what happens to home equity loan in foreclosure can potentially help you keep your home and avoid further financial damage from your home equity loan.

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