What Happens to Home Equity Loans in Foreclosure?

An equity loan can cost you your home, just the same as a primary mortgage. Your equity loan is a contract. If you default on that contract, the other party, the lender, has the right to claim its collateral. The foreclosure process is more complicated when a home equity lender wants to foreclose, due to a first lien already being in place -- but it will happen nonetheless.

Lien Priority

The position of the home equity lien is important to the foreclosure process. Older liens have first priority over newer ones. So if you get a $200,000 mortgage in 2009 and a $50,000 home equity loan in 2012, the mortgage has first priority. For the equity line to move forward with foreclosure, it has to pay off the first lien. The exception to this rule involves tax liens. A tax lien takes priority over everything else, no matter when it was filed.

Default Notice

After more than 90 days of missed payments, your loan will be in default. You will receive notice from your lender informing you that you must pay the entire loan immediately. Odds are this won’t be possible, so the bank will move ahead with foreclosure. You have a period of time, typically three months, to either pay off the loan, bring it current, or work out some last ditch deal with your lender. If you don’t, the process will move on to the next step.

Notice of Sale

If you can’t manage your way out of default, the lender will set a foreclosure auction date. It will post a notice of sale on the property, at the county clerk and in local newspapers. These ads will be published over a three or four week period, letting interested buyers know that a property is available at a reduced foreclosure rate. You will still have a very brief window, up to five days prior to auction, to make things right before the property is auctioned off.

Auction

The auction, sometimes known as a sheriff’s sale, is the method via which the lender will sell off your home. Most often, these auctions cover several properties and are held on the steps of the county courthouse. The opening bid will be the amount of the home equity loan, plus the outstanding balance of the primary mortgage. Using the example in Section 1, this would be $250,000. If the lender can’t sell the property for at least that amount, it will become real estate owned, or REO. This means that the lender will take possession of the property and broker its own deal. If the bid is met, the winning bidder will make a deposit and pay the balance in cash within 24 to 48 hours.