Can a Lender Foreclose on a Home Equity Loan or HELOC?

Yes—find out what you can do to stop this from happening

Two people reviewing a foreclosure notice
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If you need to borrow money and you're a homeowner, a home equity loan or a home equity line of credit (HELOC) allows you to borrow against your home equity at low rates. This means you're essentially taking out a second mortgage, and in return, your new lender will be listed with a second, or "junior" lien on your home, right after your main mortgage lender.

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.

Key Takeaways

  • Your home equity loan or HELOC lender can foreclose on your home if you default on the loan.
  • If your home is foreclosed on, any proceeds from the sale first go toward your primary mortgage, then to your home equity loan or HELOC lender.
  • Stay in touch with your lender and reach out for help if you're facing foreclosure, to lessen the chance that you lose your home.

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.

Lenders won't automatically foreclose on your home if you miss a payment or two on your home equity loan or HELOC. Generally, they'll first try several methods to collect payment, and it can take several months before they initiate foreclosure.

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.

Remember, your lender wants to work with you because it's more expensive for it to foreclose on your home.

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.

Frequently Asked Questions (FAQs)

Can I get a home equity loan when my home is in foreclosure?

It's unlikely. Home equity loans rely on you having equity in your home, and if your home is going through foreclosure, you won't have equity in your home for much longer. Thus, you'd be hard-pressed to find a lender willing to offer you a home equity loan if your home is in foreclosure.

How many years after a foreclosure does it take for a bank to give me a HELOC?

Foreclosures will stay on your credit report for seven years. However, your foreclosure's negative effect on your credit score and your ability to qualify for credit starts to fade before it falls off your credit report. Depending on your lender, you may qualify for a HELOC a few years after your foreclosure.

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Article Sources

  1. Upsolve. “Second Mortgage and Foreclosure.”

  2. Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”

  3. Citizen Bank. “Grace Period for Home Equity Loan Payment."

  4. U.S. Senate Federal Credit Union. “Lending Fees and Charges.”

  5. Legal Aid Chicago. “HELOCs and Foreclosure: The Basics.”

  6. Consumer Financial Protection Bureau. “If I Can't Pay My Mortgage Loan, What Are My Options?

  7. U.S. Department of Housing and Urban Development. “Talk to a Housing Counselor.”

  8. National Foundation for Credit Counseling. “Worried Because You Can’t Pay Your Rent or Mortgage?

  9. 211. “Help Starts Here.”

  10. Consumer Financial Protection Bureau. “If I Lose My Home to Foreclosure, Can I Ever Buy a Home Again? What Impact Will a Foreclosure Have on My Credit Report?