Your mortgage and your home equity line of credit (HELOC) are separate loans, so falling behind on your mortgage does not have a direct impact on your ability to access your equity line. However, the damage done to your credit score by falling behind on your mortgage could make your HELOC inaccessible.
When you fall more than 30 days behind on your mortgage payments, your lender can notify the credit reporting agencies. Payments at least 30 days late have a negative impact on your credit score. Your score drops further if you fall 60, 90 or 120 days behind on your mortgage payments or any other debt. Most home equity contracts include a clause that allows your lender to reduce or freeze access to the unused portion of your line in certain situations, such as a change in your financial circumstances. Banks may consider a drop in your credit score a "change in your financial circumstances," and they can, therefore, freeze your HELOC if this occurs.
Laws pertaining to foreclosure vary from state to state, but you are usually regarded as having defaulted on a loan if you fail to make your regularly scheduled payment within 30 days of the due date. When you default on a home loan, your lender can begin foreclosure proceedings. The first step is for the lender to send you a lis pendens notice and record a copy of the lis pendens at the local courthouse. This serves as a notice that formal foreclosure proceedings are about to begin. Your HELOC lender could freeze your line on the basis of lis pendens filed by your mortgage lender to prevent you from accumulating any more debt on your home.
When you draw on your HELOC, you increase your debt load. If your mortgage lender begins foreclosure proceedings, you must immediately repay both the mortgage and the HELOC. If you fail to do so, your mortgage lender sells your home and uses the sale proceeds to pay off your mortgage. Remaining funds are applied to your HELOC debt, but, in many states, the foreclosure process does not end with the sale of your home. Some states have recourse laws that allow your equity or mortgage lender to sue you for the remaining debt even several years after you lose your home.
You can draw on your HELOC if you are behind on your mortgage, but only do so if you are willing to accept the long-term consequences of adding to your home loan debt. Some homeowners draw on their HELOC to stave off foreclosure by using the funds to pay on their mortgage. However, when you do this, you end up paying interest on the same debt twice -- once on the mortgage and again on the HELOC. Additionally, you cannot continue to do it forever, as, at some point, you will exhaust your HELOC and go into foreclosure owing a huge debt.
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