what happens to home equity loan in foreclosure

When a homeowner is facing foreclosure, it is crucial to understand what happens to a home equity loan in this unfortunate situation. A home equity loan is a line of credit that uses the borrower’s home as collateral. If the borrower fails to make payments on their mortgage, it can lead to foreclosure. In this article, we will explore the fate of a home equity loan when a foreclosure occurs.

1. Priority of Payments

During a foreclosure, different types of loans have distinct priority levels. Typically, the original mortgage or the first lien on the property takes precedence over the home equity loan, which is considered a secondary lien. This means that any proceeds from the foreclosure sale will be used to repay the primary mortgage lender before the home equity loan lender receives any payment. In some cases, if there is not enough money from the sale to cover both loans, the home equity lender may not receive any payment at all.

2. Deficiency Judgment

When a foreclosure sale does not generate enough funds to repay all the outstanding debts, including the first mortgage and the home equity loan, it can result in a deficiency. A deficiency is the difference between the amount owed on the loan and the actual sale price of the home. In some states, the home equity lender may have the option to pursue a deficiency judgment against the borrower. This means that even after losing their home, the borrower may still be required to repay a portion of the home equity loan through other means.

3. Debt Discharge through Bankruptcy

Another possible outcome for borrowers with a home equity loan facing foreclosure is bankruptcy. Filing for bankruptcy can halt the foreclosure process temporarily and give borrowers an opportunity to reorganize their debts. Depending on the type of bankruptcy filing, borrowers may be able to have their home equity loan discharged. However, it is essential to consult with a bankruptcy attorney to understand the specific rules and requirements in your jurisdiction.

4. Loan Modification or Loan Workout

For homeowners who want to avoid foreclosure and keep their homes, seeking a loan modification or workout may be an option. During a loan modification, the terms of the original mortgage are altered to make the loan more affordable for the borrower. In some cases, the home equity loan can be included in this modification process. However, it is crucial to note that these options are subject to the lender’s approval and may not always be successful.

5. Impact on Credit Score

Foreclosure, whether it includes a home equity loan or not, can have a significant negative impact on a borrower’s credit score. This can affect the borrower’s ability to secure future loans, obtain affordable interest rates, and even impact employment opportunities. It is important to keep this in mind when considering the repercussions of home equity loans in foreclosure and to explore all possible alternatives to avoid this situation.

In conclusion, when a home goes into foreclosure, the fate of a home equity loan depends on various factors such as the priority of payments, the possibility of a deficiency judgment, the potential discharge through bankruptcy, and the chances of a loan modification or workout. It is crucial for borrowers to seek professional advice and explore all available options to navigate these challenging situations.