What happens to HELOC in a foreclosure?

by oliver on September 30, 2010

Question:

What happens to HELOC in a foreclosure?

Answer:

HELOC or Home Equity Line of Credit loans are similar to second mortgages which are subordinate loans. If the property is foreclosed on or is sold thru short sale, the primary lender is repaid first before any other holder of the mortgage. If the money is not enough to pay the first or primary mortgage, the HELOC lender can garnish the wages of the borrower.

Aside from this, the HELOC lender can also put a lien on the borrower’s property for a period of 20 years until it recovers its money. Even if HELOC loans are secured against the home’s equity, it is also considered as a recourse loan, which means if the equity and the home itself are gone, the lender can still go after the borrower for repayment. Your primary mortgage holder and HELOC lender may work out an agreement such as a short sale wherein your house is put up for sale in the open market. In this option, the HELOC lender and mortgage holder gets a certain percentage of the proceeds and then forgives the remainder of the loan. Doing this is beneficial to both parties because it can save the mortgage lender from possible legal entanglements of foreclosure, and the HELOC lender can get a percentage of the money owed.

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