Can a home equity loan go into foreclosure?

If you need the money and have paid off a good portion of your mortgage, a home equity loan can be an attractive option. These loans generally have lower interest rates than other consumer loans because they are secured by real estate.

Using your home as collateral is not a problem if your borrowing terms are reasonable and your finances are in place. Nevertheless, under bad circumstances it can quickly turn into a nightmare. Failure to make payments can result in loss of property and even lawsuits.

important point

  • If you can’t repay your home equity loan, the lender will typically seize the property you used as collateral, but only if the sale raises enough money to recover the amount you owe.
  • A home equity loan lender can recover from a foreclosure only after the first mortgage is paid off.
  • In other words, the home must be worth more than the first mortgage in order for the foreclosure to be valuable to the second mortgagee.
  • If foreclosure isn’t a viable option or if you can’t adequately repay your debts, your lender may sue.
  • Uncollectible debt is treated as regular income by the Internal Revenue Service (IRS).

What is a Home Equity Loan?

A home equity loan is basically a loan that allows you to borrow cash in a lump sum with your home equity as collateral. For example, if the property is worth $500,000 and he owes $200,000 on the first mortgage, he has $300,000 of capital that can be used as security for the second loan.

Lenders offer more competitive borrowing rates when you use your home as collateral. This is to give you something worth seizing and selling to recoup some or all of your losses if you are unable to continue paying. This means your loan will be cheaper, but you also risk losing your home if you default.

What happens if I don’t pay my second mortgage?

If you are unable to repay your home equity loan for any reason, the lender may choose to foreclose on the home you used as collateral. Creditor actions usually depend on the value of your home, whether there are other liens on it, and how much you still owe.

When a borrower defaults on their first mortgage (the loan they used to buy their home), the lender is very likely to initiate foreclosure proceedings to get their money back. Whether this same approach is taken for her second mortgage depends on the value of the property and the amount of assets held by the borrower.

This is because the first mortgage has priority because it was recorded earlier in the county land record. So, if you can’t pay off your home equity loan and the secured home is sold and the debt is paid off, the proceeds are first used to extinguish the remaining payments on the first mortgage. The second mortgage lender can only begin collecting what they owe after the higher lien has been respected and repaid.

The more home equity you hold, the more likely the lender will choose to foreclose.

high value housing

If your home is currently worth more than you owe on your original mortgage, selling it will allow your mortgage provider to return the money you lent them, or at least a reasonable portion of it. should be recoverable. In that case, the lender may initiate a foreclosure.

Think about it like this: The more money the second mortgage holder could potentially recover from the foreclosure sale, the more likely he or she would go down this road.

Most home equity loans are recourse loans. In other words, in the event of default, the creditor is given complete discretion to the borrower not only to liquidate the collateral, but also to repay the entire amount owed.

in the water

If you are in the water, which means that your house is worth less than what you owe on your first mortgage, your second mortgage is effectively unsecured. The owner probably won’t get a cent pushing the sale, and a foreclosure would be a waste of time and resources. If enforceable, the debt must be collected by other means.

If a home equity lender is in this position, they may go to court to collect their debt, if state law allows it, and if it’s worth it. Once a default judgment is entered, the lender can seize bank accounts, garnish wages, and place liens on other properties to recover outstanding balances.

And the chase doesn’t stop there. After exhausting all debt collection methods, if the lender has not yet pocketed the debt, the creditor can report the debt deemed uncollectible to the Internal Revenue Service (IRS). The IRS treats canceled debt as regular income. So if you have $5,000 of canceled debt and are within the 22% tax rate, you will be taxed at $1,100.

If you can’t pay your taxes, you can make a payment plan. However, the IRS charges a fee for this privilege.

special considerations

Mortgage lenders can seem like enemies if you’re struggling to pay them off, and it’s best to avoid them at all costs. Communicating openly from the beginning can prevent minor disruptions from turning into financial disaster.

Don’t hide by burying your head in the sand. It is in the lender’s best interest to recover the money as easily and cheaply as possible, and foreclosures and lawsuits are generally lengthy and costly. Your lender may find another solution and give you more time if you prove you are communicative and trustworthy.

What if the lender gives you more credit than you can repay?

Don’t come this far. First, the borrower should read the document before signing and never agree to anything they do not understand or cannot afford. Second, lenders are heavily regulated and, in theory, are not allowed to run loans that clients cannot repay. complaints can be filed.

Can I pay off my home equity loan early?

absolutely. Before proceeding, however, you should determine if the loan has an upfront penalty and, if so, whether paying off the debt ahead of schedule would be a smart move.

Do Home Equity Loans Affect Your Credit Score?

According to LendingTree research, most borrowers initially notice a decline in their credit score after taking out a home equity loan. However, this decline is small and tends to recover within a year. Provided, of course, that the borrower continues to pay the loan.


Defaulting on a home equity loan can lead to foreclosure if it makes financial sense for the lender. The more home equity you have, the more likely creditors will pursue this course of action.

But that’s not all. Recourse loan lenders can try all available routes to get back what they owe. Wages, savings, and other assets can be targeted and deprived if seizures are not sufficient.

This should serve as a reminder of how dangerous home equity loans can be. Do not sign up unless you fully understand the terms and are confident you can continue to pay back.

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