What happens if the 2nd forecloses but the first does not?

If the homeowner stops making payments on thier 2nd (Heloc) but keeps the first current what happens in that event?


The second may file for foreclosure and in that case the house is definitely in “foreclosure” no matter whether the 1st hasn’t yet…

Yes, the 2nd can foreclose on the whole property. What will happen is that they will force a sale of the property and with the proceeds pay off the 1st and keep what is left. Now, if the total loan amount including the 2nd will not yield enough to get anything, then it’s likely that the 2nd will not pursue foreclosure (why would they pay all that to get nothing?).

Here is what is important to remember about a HELOC. Technically it is like a credit card. So “at worst” the consequences to the homeowner’s credit is more severe than if the 2nd were a regular “closed” second mortgage. A credit card type equity line has a much longer statute of limitation (up to 25 years) for pursuing unpaid debt. A regular 2nd mortgage goes away at foreclosure or short sale.

In our short sales, when a HELOC is involved, we work to make sure they issue the homeowner a 1099-C, which essentially is acknowledgment that the debt is cancelled by the HELOC or 2nd mortgage lender. Without it, the debt can pop up on the seller’s credit even years after the fact. Make sure seller saves all short sale correspondence from lender in case they need it to fix their credit report later.

If a hardship exists and the homeowner can’t keep up with payments, I suggest they contact both lenders and try to work out a loan modification or short sale before either of them can initiate a foreclosure.