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What Happens to Home Equity Loan in Foreclosure?
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After a different mortgage is foreclosed on, a borrower with a home equity loan may still be responsible for that amount. When a mortgage loan is not being repaid, a lender may initiate the legal procedure of foreclosure to seize property ownership. When a borrower faces foreclosure, the other lender immediately notifies the home equity lender.
What Is Home Equity?
Your home’s equity is the sum of the amount you owe compared to its current market worth. It is the amount of the worth of your house that you possess. For instance, if you put $50,000 down and borrowed $150,000 to buy a $200,000 home, your equity in the property would be $50,000.
Equity is the property’s value less any liens, which are sums payable for mortgages and other debts. When your mortgage loan balance falls below your residence’s appraised value, you have equity in your house. In contrast, you do not have equity if your mortgage debt exceeds the value of your home. You can anticipate losing that money during the foreclosure process unless you have considerable equity in your property.
What Happens to Home Equity After Foreclosure?
Even in the event of a mortgage failure and foreclosure on the home, home equity remains the homeowner’s property. But the equity may be reduced during the foreclosure process.
A home equity loan is the borrower’s home equity. Equity is the portion of the home’s value that the borrower owns outright, unencumbered by other debts or liens. Homeowners frequently use home equity loans for house improvements, to pay for other obligations like a child’s college tuition, and to cover unforeseen costs like roof repairs.
When homeowners take out a home equity loan, they receive a lump sum of cash. The equity loan is then due in instalments from her. She also has to pay the mortgage she used to buy the property. The mortgage will typically be larger than the home equity loan and will be given legal precedence over it. As a result, the first lender has priority over the second lender when it comes to receiving payment from the profits of a foreclosure process, which is often a public auction or sale of the property.
The remaining balance of a home equity loan may still be due by a borrower whose primary loan was foreclosed upon. The asset is no longer supported by the equity loan and is now considered personal debt. The lender has the option to pursue legal action to acquire a civil judgement for the remaining amount owed on the equity loan in addition to continuing collection efforts against the borrower.
In some states, the second lender may request a deficiency judgement. Deficiency judgments cover the difference between the outstanding home equity loan balance and the foreclosure sale proceeds obtained by the second lender.
Even if there is another loan, the home equity lender may begin foreclosure procedures for nonpayment. The initial lender is aware of the situation and is allowed to contest the foreclosure in court. The home equity lender and the primary lender may have a subordination agreement. A subordination agreement establishes the superiority of one debt over another in terms of repayment enforcement.
After a foreclosure, certain states do not permit a home equity lender to pursue a judgement against the borrower for the remaining loan amount. Even if the debt is not being collected, the home equity lender is nevertheless permitted by the IRS to record the outstanding loan balance as income. The borrower’s federal tax return may need to include additional tax payments due to the income gain.
The property may be purchased at the foreclosure auction by a second lender. The likelihood of a second lender making a bid increases if the second loan has a high balance and the lender thinks the house can be sold for a fair price, allowing the second lender to recoup some of its loss on the unpaid loan.
The Process of Foreclosure
You may not have enough cash to cover the whole purchase price upfront when you purchase real estate (also known as real property), such as a home. However, you can put down a portion of the price and then borrow the remaining amount (to be repaid in future years).
Homes can cost hundreds of thousands of dollars, yet the average person’s annual income is far below that. Why do lenders feel comfortable making such big loans? The property you’re purchasing will act as collateral for the loan, and as such, you agree the lender may seize the property to recoup the money borrowed from you if you stop making payments.
The lender has a lien on your property to secure this right and to increase their chances of receiving enough money; they (typically) only lend if you have a favourable loan-to-value ratio.
The surplus fund is first used to pay the trustee and legal fees. The trustee’s expenses include filing fees, services, and postage charges. The trustee then distributes the remainder of the loan to cover the debts covered by the deed of trust. The trustee distributes money to junior lien holders, such as home equity lines of credit, after the lender is paid. Finally, the owner may use the equity in the property to claim any excess funds. To claim the surplus proceeds, you must contact the trustee within 30 days following the foreclosure sale.
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