If you have a home equity line of credit on your home, you have a second lien on the property. Just because the loan is a line of credit and works in much the same way as a credit card, it is still a lien on your property. If you were to default on your HELOC, the lender does have rights to force foreclosure. However, there are issues that could prevent the lender from initiating the proceedings.
A Second Lien
The lender who holds your HELOC is in second lien position. This means if foreclosure proceedings began, the first lienholder (your first mortgage company) has rights to the proceeds of the sale of the home. This means the junior lien holder gets whatever is left after the sale of the home. This includes any money the first lender needs to spend in order to sell your home. This often leaves the second lienholder with nothing depending on the value of the home and its selling price.
In a majority of cases, the HELOC is a second or junior lien. This is the case even if you refinanced your first mortgage down the road. Any lender providing a first mortgage requires the second mortgage holder to subordinate their mortgage even after refinancing the first mortgage.
What if you Default?
If you default on your second mortgage, the lender does have legal rights to foreclose on your property. However, it depends on the value of your home and the amount of equity you have. If you are underwater – you owe more than the home’s value, it does not make much sense for the lender to consider foreclosing on your home. At this point, the second mortgage holder has an unsecured loan because there are no assets in the collateral you put up for the loan.
If, however, you have equity in the property, the lender may decide to initiate foreclosure proceedings. If this occurs, as discussed above, the first mortgage holder receives priority payment. Any money left over after the first lienholder receives their money could go to the lender holding the HELOC.
Personal Lawsuits after Foreclosure
A unique stance a HELOC lender has if they were to initiate a foreclosure on your property is the ability to sue you for the outstanding amount. Let’s say your home was worth $200,000 at the time of foreclosure and the outstanding amount on your first mortgage equals $150,000. During the sale, the bank accepted $150,000. This leaves nothing for the lender holding the HELOC. Since foreclosure proceedings completed, the liens no longer exist on the property. However, the debt still exists. The junior lienholder can come after you for the money you owe.
The lender can sue you in court. If the court agrees with the fact that you owe the money, the lender can ask to have your wages garnished or your bank accounts frozen. Another solution is for the lender to ask to attach the lien to any other properties you own now or will own in the future.
Your HELOC is a promise to pay the bank back for the amount you borrow or you promise to turn in your collateral (your home) in exchange for payment. Because the loan is in second lien position, it has a unique take on your collateral. Most second lienholders do not foreclose on a home because there would be nothing left for them to take. However, because they have the ability to sue you personally, there is a large risk of defaulting on your HELOC. The risk of foreclosure and judgment should be enough to make you try to figure out a solution to get your HELOC paid.