Can Default on HELOC Cause Foreclosure?

You may be able to resolve late mortgage payments.

Home equity lines of credit offer convenient terms for borrowing a lump sum of money. If you need a loan to pay for water damage to your home or replace the transmission in your vehicle, a HELOC can provide the funds you need. However, if your loan payments fall behind too far, you can receive a notice of default.

HELOC

Borrowers obtain HELOCs for a variety of reasons, such as debt consolidation, major home improvements, travel expenses and tuition costs. HELOCs typically enable a borrower to use a portion of his home's equity to secure a line of credit. Many lenders use the opinion of a licensed appraiser to determine property values. HELOCs typically offer more competitive interest rates than other types of unsecured loans.

Terms

Loan terms are established before a borrower is eligible to use a HELOC. A loan officer generally explains the terms and conditions of the HELOC during the application process. The loan terms are reviewed at the closing of escrow to ensure the borrower understands her commitment to repay the lender as agreed. Similar to other bills, HELOCs are due monthly if you have an outstanding balance. Your lender should send a statement that reflects your next payment and the due date. Failure to pay a HELOC as agreed can lead to late fees, collection activity or a home foreclosure.

Foreclosure

Foreclosure can result for a borrower who defaults on his HELOC. If the outstanding payments or loan fees exceed a lender's agreed upon terms, a homeowner may start to receive legal notices. Typically, a borrower is several months past due on his mortgage payments and an attorney is hired to help the lender collect outstanding amounts owed or legally reclaim the property through a home foreclosure. A HUD counselor may be able to provide local resources to assist you with foreclosure help (see Resources).

Considerations

A borrower has the right to cure a defaulted loan before the foreclosure date. Contact should be made with your lender to discuss payment arrangements or other methods for curing the default. Foreclosure procedures vary according to state laws. However, it's important to speak with your lender if collection activity begins. You might be able to avoid foreclosure and attorney fees.

References

• Federal Reserve Board: 5 Tips: Protecting Your Home From Foreclosure
• Federal Reserve Bank of Chicago: Foreclosure Mitigation Toolkit

Resources

• The Federal Reserve Board: What You Should Know About Home Equity Lines of Credit
• Department of Housing and Urban Development: HUD Approved Housing Counseling Agencies