What happens to HELOC in a foreclosure?

by oliver on September 30, 2010

Question:

What happens to HELOC in a foreclosure?

Answer:

In 2008 – 2009, many people from all the economic backgrounds were affected by the recession in the housing industry. As grave as the effects of foreclosure may be, those who acquired HELOC or Home Equity Line of Credit Loan had more problems to deal with. HELOC loans are similar to second mortgages which are considered as subordinate loans. If a property is foreclosed on or sold through short sale, the primary lender is repaid before any other mortgage holder.

If the lender is not paid with the required amount on the first mortgage, the HELOC lender can garnish the wages of the borrowers. Or worse, the HELOC lender may put liens on their property for up to twenty (20) years to recover its money. Remember that this type of loans are secured against the equity of the home.

However, such loans are also considered as recourse loans, wherein the lender can oblige the borrower to pay even if the equity and the home itself are gone. Nevertheless, your primary mortgage holder and HELOC lender may negotiate in order to put your home up for short sale. In this type of sale, each party will receive a certain percentage of the proceeds and will “forgive” the remainder of the loan.

This agreement would be beneficial for both parties because it can save the primary mortgage holder from possible legal disputes involved in the foreclosure. In the same way, through short sale, the HELOC lender can get some of the percentage of the money owed.

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