From the homeowners perspective, is a HELOC treated the same as a 2nd loan in a SS or foreclosure on a Primary Residence? My HO heard that because it is a revolving credit she can be liable for the deficiency if foreclosed (even with the new law) and because of this, the bank doesn’t need to negotiate a SS. Has anyone had success with a HELOC SS. Thanks
A HELOC is fundamentally different from a “closed” 2nd mortgage, but many homeowners used HELOCs in lieu of a traditional second mortgage to take advantage of the “zero down” mortgage packages in the last couple of years. A HELOC is fundamentally a recourse, revolving credit account. Depending on the lender, they may or MAY NOT settle the loan at a short sale or foreclosure.
In a short sale negotiation, the HELOC will not take the usual $1000 offer and may want up to 50% of the outstanding loan amount. There is some room for negotiating if the homeowner is willing to take an unsecured loan on the settlement amount. Essentially the HELOC will reconstitute the loan as a type of revolving account for some part of the loss. So, you as the negotiator can split the amount in order to get a short sale approval. For example:
- HELOC balance is $30K
- Lender for the 1st will only approve $1000 to the second/HELOC
- HELOC wants $15K to release lien
- You negotiate $1000 for a release of lien and and additional $10K in the form of an unsecured instrument from the homeowner
- HELCO accepts and gives you release of lien for $1000 and places a new note in escrow for the $10k loan homeowner must sign
[i]“IF” the HELOC lender forgives the outstanding $19K loss, they will issue a 1099-C to the homeowner and technically can no longer go after the homeowner for the $19K in the future. This doesn’t guarantee that they or their collection agency won’t try. The homeowner must hang on to that 1099-C and use it as proof that the debt is paid if it ever creeps up on their credit in the future.
If the HELOC lender does not or refuses to give the homeowner a 1099-C - then Yes, they will be on the hook for the outstanding unpaid debt - like any other revolving account.[/i]
You get the short sale approved and homeowner escapes foreclosure. However homeowner now has a revolving loan with the HELOC company for $10k that he/she must pay. If they don’t pay, it will end up on their credit as a collection. Make sure you get that 1099-C and make sure that it is placed in escrow by the HELOC lender prior to close.
Beware: In some states, the statute of limitations for revolving debt that has not been settled at bankruptcy can be as long as 25 years.