However, a big question looms: What happens if you default on this debt? Your lender technically has a claim on a portion of your home equity at that point. Will you lose your home in that case? Find out if your lender can foreclose on a HELOC or home equity loan and what you can do about it.
What Happens if You Default on a Home Equity Loan or HELOC?
If you default on your HELOC or home equity loan, a few things could happen, depending on what you signed in your loan agreement, your state’s laws, and how long it’s been since you missed your last payment.
Early Default: You May Owe a Late Fee
If you’ve just missed a single payment, don’t panic. Most lenders have a provision called a “grace period” during which you have a certain number of days, often 10 to 15, to make the payment if you miss it on the due date. If you go past the grace period, you’ll owe a late fee. The amount of the late fee depends on what you agreed to in the contract, but it’s often around 5% of your missed payment amount. Your lender will continue reaching out to you until you make a payment. If it’s been around three months, usually you can expect that your HELOC or home equity lender will take more drastic action.
Late Default: Your Home May Be Foreclosed On
At this point, the lender may force you to foreclose on your home. If this happens, your primary mortgage lender will be first in line to get paid from the proceeds of selling your home, and your HELOC or home equity loan lender will be second. If there’s not enough to pay back the loan, they also may be able to sue you in court for the remainder that you owe. Remember, your HELOC or home equity loan lender can put your home into foreclosure even if you’ve been regularly paying your primary mortgage the whole time. Some things can make it more or less likely that your HELOC or home equity loan lender chooses this option, however. If you have a lot of equity in your home, they may be more likely to foreclose on your home, for example.
How Foreclosure Affects Existing Home Equity Loans and HELOCs
It doesn’t matter much whether it’s your primary mortgage or your home equity loan or HELOC that gets foreclosed on. The same thing happens either way: You will lose your home, and it will be sold to someone else. The cash generated from that sale first goes toward paying off your existing mortgage, then to any other lenders with a lien on your home, including a HELOC or home equity loan.
How To Stop the Foreclosure Process
If you’re facing foreclosure, the most important thing to remember is that it’s a multi-step process that doesn’t happen overnight. That gives you time to stop the foreclosure proceedings, if you act in time. The following are some ways to stop foreclosure proceedings.
Reach Out to Your Lender
It may be scary, but this is the best first step to take. Your lender or mortgage servicer may be able to offer solutions such as forbearance, modifying your loan payments to be more affordable, making a payment plan, or arranging a short sale, among other alternatives.
Talk to a Counselor and Get Help
There are a lot of counselors and places you can reach out to for personalized assistance. HUD-approved housing counselors can help you decide the best course for your home. You can also get help on housing and finance issues from the nonprofit National Foundation for Credit Counseling. Also, 211.org can help connect you with local organizations that can assist you, such as grant programs for foreclosure prevention, tenant’s rights, and more. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
