What Happens If You Can’t Pay Your HELOC?

A Home Equity Line of Credit (HELOC) allows homeowners to borrow against their home’s equity, which is the portion of its value owned outright (market value minus mortgage balance). Functioning like a credit card, a HELOC provides a revolving credit line up to a set limit, secured by your home as collateral.

Homeowners use HELOCs for purposes like home improvements, debt consolidation, or major expenses. While offering convenient access to funds and lower interest rates than unsecured loans, a HELOC carries substantial risk. Since your home secures the loan, failing to repay can lead to severe consequences for your property and financial standing.

Immediate Effects of Missed Payments

Missing a HELOC payment initiates immediate consequences from your lender. Lenders typically assess late fees, detailed in your HELOC agreement, which can be a fixed amount or a percentage of the overdue payment. Beyond these penalties, the interest rate on your outstanding balance may significantly increase.

Many HELOC agreements include a “default interest rate” clause, allowing the lender to raise your variable rate by several percentage points after a missed payment. This higher rate applies to the entire outstanding balance, increasing subsequent payment costs. Lenders will also begin direct communication, escalating as delinquency continues, to remind you of the missed payment.

A single missed payment, even if quickly remedied, negatively impacts your credit score. Lenders typically report delinquencies to credit bureaus after 30 days, causing a noticeable drop in your score and signaling higher credit risk. Your lender might also freeze or terminate your draw period, preventing further access to funds and restricting your ability to borrow.

Understanding the Foreclosure Process

When a HELOC enters severe default, the lender can initiate foreclosure proceedings because the loan is secured by your home. The process begins with a formal notice of default, informing you of violated loan terms and the lender’s intent to pursue legal action if the default is not cured. This notice often specifies a 30 to 90-day period to catch up on missed payments and avoid further action.

If the default is not resolved, the lender will proceed with either a judicial or non-judicial foreclosure, depending on your HELOC agreement and state laws. Judicial foreclosure involves a court lawsuit to obtain a judgment for property sale, a process that can take months to over a year. Non-judicial foreclosure, permitted in some states, allows the lender to sell the property without court intervention if the loan documents contain a “power of sale” clause.

Regardless of the method, foreclosure aims to sell your home at a public auction. Proceeds repay the outstanding HELOC balance. If the sale price is less than the amount owed, the lender may pursue a “deficiency judgment” for the remaining balance, meaning you could still owe money after losing your home. If the sale generates a surplus, it is typically returned to you after all liens are satisfied.

Impact on Your Credit

Defaulting on a HELOC severely damages your credit history and score. Each missed payment, reported to credit bureaus after 30 days, registers as a negative mark. As delinquency progresses, the credit score reduction increases significantly. If the HELOC is charged off or goes into foreclosure, these derogatory events appear prominently on your credit report.

A foreclosure, whether due to a HELOC or primary mortgage default, is one of the most damaging events on a credit report. It can cause a credit score to drop by hundreds of points, making new credit exceedingly difficult to obtain. These negative entries, including missed payments, charge-offs, and foreclosures, typically remain on your credit report for up to seven years from the initial delinquency, affecting financial opportunities long after the event.

The implications extend beyond new loans. Lenders will view you as a high-risk borrower, leading to higher interest rates on any secured credit, if approved. Obtaining a new mortgage or refinancing becomes challenging for several years after foreclosure. A poor credit history can also affect insurance premiums, rental applications, and employment background checks, as financial responsibility is often considered.

Available Paths for Resolution

If you face difficulties making HELOC payments, several resolution paths may be available, depending on your lender’s policies and financial situation. Contact your lender directly to discuss your hardship. They may offer options like forbearance, which temporarily reduces or suspends payments, or a repayment plan to catch up. Loan modification, changing terms like interest rate or repayment schedule, might also be possible.

Another option, especially with significant home equity, is selling the property. This allows you to use proceeds to pay off the HELOC and primary mortgage, avoiding foreclosure and its credit consequences. If your home’s value is less than the total owed, a short sale might be an alternative. In a short sale, the lender accepts less than the full amount to release the lien, but this requires approval and can still negatively impact credit.

Refinancing your HELOC, or your primary mortgage to include the HELOC balance, could provide relief through lower interest rates or more favorable terms. This option becomes difficult to obtain once payments are missed, as lenders hesitate to extend new credit to defaulting borrowers. As a last resort, filing for bankruptcy (Chapter 7 or Chapter 13) can address secured debts like a HELOC. While bankruptcy can halt foreclosure and discharge certain debts, it carries significant long-term credit implications and should be considered only after exploring all other possibilities.