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What happens if I can't make payments on a HELOC?

What to expect if you can’t make payments on your HELOC

Failure to make payments on a loan or debt results in default. But what exactly happens if you can't make payments on a home equity line of credit? 

Key Takeaways:

  • If you are having trouble making monthly minimum payments on a HELOC, contact your lender immediately to try to re-negotiate loan terms and repayment schedules

  • A HELOC goes into default after 2 months of non-payment

  • Once in default, lenders can try to obtain payments via a credit collection agency, have your wages garnished, or foreclose on your property

  • A bank's decision to foreclose will depend on if they believe foreclosure will cover the debt (that is, after the home sale there will be money to cover the primary mortgage first before paying off the HELOC)

Home equity loans and home equity lines of credit (HELOCs) are attractive and cost-effective methods to borrow money. They provide homeowners with the capacity to access the equity in their home for a range of purposes, such as making home improvements, paying for education, and consolidating other higher-interest types of debt. Home equity loans and HELOCs are secured by your property, meaning that if you default on payments there is a risk of foreclosure, repossession, or garnished wages.

If you find yourself having trouble making payments on your debt, it is crucial that you get in contact with your bank or lending institution immediately. The more you communicate your circumstances, the more likely a lender is to work with you in order to keep you in your home. Banks and financial institutions are always looking at the bottom line, and often making arrangements with a borrower will be more economical for them than going through a foreclosure or collection agency. 

HELOC default and home foreclosure

A foreclosure occurs when a homeowner defaults on a loan, such as a home equity loan or HELOC, and the lender initiates legal action to take possession of the property. However, before taking legal action to foreclose on a property, a lender will make several attempts to collect the debt. This means if you are only 1-2 months behind on your HELOC payments, you won't necessarily end up in foreclosure.

HELOCs and junior lienholder default

The lender of a home equity line of credit is considered a "junior debtor" with the primary lienholder being the lender of your primary mortgage. A loan default can pave the way for foreclosure, which is a legal action taken by lienholders (senior or junior) to recover what is owed them. The lienholder's position in the hierarchy of titles determines their eligibility to receive payment from the proceeds of foreclosure. If a lienholder holds a senior position, such as first or primary mortgages, then they will be paid first and there may not be enough money left for those with junior lien positions. Even so, if a junior lienholder, such as a HELOC lender, feels confident that they will get repaid after foreclosure, then they may opt to proceed with it regardless of their title position.

The home foreclosure process

When a payment is one month late, the lender will usually inform the borrower and add penalties or late fees to existing charges. After two months of missed payments, the lender will likely start trying to make direct contact with the borrower. Often the borrower will be offered options to help them get caught up on payments or at least not fall further behind. 

Finally, after 3 or more months of missed payments, if the lending institution is unable to negotiate with the homeowner, a "demand letter" will be sent which notifies the debtor of their outstanding balance and gives 30 days for the account to be paid up to date. Following the demand letter, a notice of default is sent, which marks the beginning of the foreclosure process.

If there is sufficient equity in the home, it's likely that lenders will choose to foreclose because they have a chance of recovering some money after the first mortgage is paid off. However, if the homeowner is underwater—meaning their home is worth less than what they owe—then lenders may be less likely to foreclose because they won't receive any money after repossessing the property.

In general, lenders are usually more eager to foreclose when homeowners still have considerable equity in their homes. Foreclosure costs can often be too high for lenders if there isn't enough value in the property for them to recoup any funds even after paying off the existing debt load. Fortunately for those who are struggling with payments on a home equity loan or HELOC, lenders won't always automatically initiate foreclosure proceedings and may instead offer other options such as forbearance or loan modification programs that could help borrowers avoid foreclosure altogether.

Contact your HELOC lender when you can't make payments

In today's economic climate, it is important to act quickly in order to protect the home that backs your HELOC or home equity loan. When it comes to mortgages, lenders and banks don't want you to default on your payments and are often willing to work with you if you need help. If this is the case, it is essential that you make contact with your lender as soon as possible. 

Do not avoid interactions with your bank due to fears of defaulting and foreclosing. Banks are usually more willing to work with you the sooner you get in contact with them, and may not be as accommodating if you ignore their attempts to provide assistance.

Your lender will generally offer several options when it comes to helping you manage your loan or line of credit. This can include loan modifications which potentially reduce the amount of interest or time period for the payment of the debt. Of course, some lenders may choose not to enter into loan modification agreements, so it’s important that both borrower and lender agree on a reasonable solution that meets both their needs. Nevertheless, waiting too long could cause even bigger problems as lenders are less likely to cooperate if no action has been taken over an extended period. 

Government assistance with HELOC payments

The Homeowner Assistance Fund (HAF) is a federal program that aims to help families at risk for foreclosure. Requirements for HAF resources vary by state whether it covers home equity loans and HELOCs. 

Missed HELOC payments and credit score

One of the consequences of missing HELOC payments is that it can greatly reduce your credit score. When a borrower starts to miss payments on their loan, their lender will report its delinquency status to the major credit bureaus. This can have a significant impact on credit scores, often causing scores to decline drastically in a matter of moments. And once you default on a loan, the information may remain on your credit report for several years and cause ongoing financial hardship.

Having a loan go into default means that obtaining credit in the future can become more difficult and more expensive. You will need to pay higher interest rates and additional fees when applying for new loans or lines of credit.

Unpaid HELOCs, credit collection agencies, and garnished wages

If you can't make payments on your HELOC, the original lender has the right to sell the loan off to another party such as a credit collection agency. Collection agencies may pursue defaulted debt for several years and even seek court-ordered judgments against debtors. These judgments can be used to garnish wages from those that fail to repay their debts. Having an unpaid home equity line and being pursued by a collection agency can create a significant financial burden, making it more difficult to catch up on payments and pay for other necessities.

Conclusion

Borrowers should stay informed of their obligations related to HELOCs and other loans and should take steps proactively in the event of financial hardship. If you find yourself unable to make your payments as scheduled contact your lender as soon as possible to see what, if any, options you have to change the repayment terms. 

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