Q: I live in Maryland and recently became unemployed. I have enough money to pay my monthly first mortgage payment with Bank A for 2 years, if I do not pay my home equity line of credit(HELOC) payment with Bank B.
Can Bank B foreclose on my home if I am current on my first mortgage payments? If Bank B cannot foreclose, what legal action can they take against me?
A: I’m sorry you have become unemployed and hope you find success in finding a job soon.
Unfortunately, you should know that either of your lenders has the right to foreclose on your home if you default on either of your loans.
When a lender gives you a home loan and you sign a mortgage to the lender, your home secures the payment on that loan. That mortgage gives the lender the right to sell the home if you fail to make good on your obligations to pay the debt. The process the lender uses to sell the home is through the courts in a case of foreclosure.
In your case, and in the case of millions of homeowners out there, you have two lenders. The first lender is probably the lender that gave you the most money to buy the property. The second lender gave you a home equity line of credit (HELOC) and those additional funds allowed you to buy the home. You along with millions of other home buyers took out these types of loans. Even first time home buyers were able to buy homes using two loans, one of those loans being a HELOC or second mortgage.
If you fail to pay on the first loan, your first lender can foreclose on its mortgage on your home. The foreclosure proceedings would allow the lender to sell the home and use the funds from the sale to satisfy its own debt. If there are any funds left over after the first lender satisfies its debt, the second lender could receive funds. In most cases these days, upon foreclosure of a first loan, the second lender holding the HELOC is wiped out.
However, if the first lender’s loan is current and is not in default, but the second lender’s loan is in default, that second lender has the right to foreclose on the home – in the same manner as the first lender – and any proceeds from the sale of the home could go to pay off the second lender. But any buyer in the foreclosure proceedings by the second lender would take title subject to the lien and obligation to pay the first lender its loan.
If your home is worth less than what you owe the second lender, it is probable that the second lender would have the remedy to foreclose on the home, but would get nothing from the proceedings. In addition, the foreclosure action by the second lender could give the first lender the right to commence its own foreclosure proceedings anyway and leave the second lender with nothing.
These days, many second lenders are cutting deals with borrowers to get them to give them something rather than face the prospect of losing everything. I have seen cases of second lenders requesting $5,000 payment from borrowers to cancel the second loan where the amount owed is $50,000 to $60,000.
But those offers by second lenders usually come when those lenders know that the homes have no equity in them and if the borrower faces foreclosure by the first lender, the second lender will end up with nothing. Those second lenders are gambling that the borrower will decide to pay the second (HELOC) lender something now and if they go into foreclosure later, at least they got some money from the homeowner early on.
While a HELOC lender has the right to foreclose on a property whenever a borrower fails to pay what is owed on a mortgage to a lender, that same lender has the legal right in most states to pursue a separate legal action against the borrower to get whatever the lender can from the borrower if that borrower has other assets.
In essence, the lender can foreclose on the property and get nothing from the sale and then turn around and ask the court for a deficiency judgment against the homeowner. If a deficiency judgment is granted – and if it is even available to the lender – the lender obtains a judgment against the borrower/homeowner for the amount still owed the lender. With the judgment, the lender can go after other assets the borrower might own.
Some states do not allow lenders to go after borrowers for a deficiency where the asset was the homeowner’s primary residence. In some states, deficiency judgments are limited as a result of the method in which lender’s decided to secure their mortgages against their borrower’s properties. And in other states, some courts may not have the desire or ability due to the case load in the courts to grant deficiency judgments against homeowners.
Finally, in many cases, many lenders are opting not to pursue deficiency judgments against borrowers as those lenders have decided that spending more money on legal costs are not worth what they may recover.
The bottom line is that your HELOC second lender can cause you a great deal of trouble if you don’t make your monthly payments. Since you have set aside enough cash to pay your first mortgage for two years, you should keep paying both mortgages on time each month and redouble your efforts to find another job before your cash runs out. If you find that you can’t make the payments to the HELOC lender, you will have to decide whether you will be able to keep the house or let it go into foreclosure or negotiate a deal with the first lender and/or the HELOC lender.
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