What Happens If You Default on a HELOC?

A Home Equity Line of Credit (HELOC) provides homeowners with a revolving line of credit secured by their home equity. The equity in your home serves as collateral for the funds accessed. While a HELOC offers financial flexibility for various needs, its secured nature implies that defaulting on payments carries significant consequences, potentially affecting your homeownership and financial well-being.

Immediate Consequences of Missed Payments

Missing a HELOC payment initiates immediate actions to recover overdue funds. Lenders impose late fees and penalties once a payment is missed, often after a grace period, typically around 15 days. These fees can range from $25 to $50, or sometimes a percentage of the missed payment. The next billing statement will reflect these additional charges.

Beyond financial penalties, lenders begin direct communication with the borrower, including calls, emails, and formal past-due notices. The account status shifts from “current” to “past due” or “delinquent,” marking a problematic payment history. This initial stage serves as an early warning that continued non-payment will lead to more severe actions.

Lender Responses and Credit Impact

As missed payments accumulate, the HELOC lender’s actions escalate. After 90 to 120 days of missed payments, the loan may be considered in default, allowing the lender to demand the entire outstanding balance immediately, a process known as loan acceleration. This means the full debt, not just the past-due amounts, becomes due and payable. The lender will issue formal demand for payment letters and notices of intent to pursue legal action.

Collection efforts intensify, involving calls from the lender’s collections department or third-party collection agencies. These agencies may pursue the defaulted debt, seeking court-ordered judgments or wage garnishments. A HELOC default significantly damages the borrower’s credit score, with a single missed payment potentially causing a FICO score drop of 50 to 100 points or more. Delinquencies and collection accounts are reported to credit bureaus, remaining on credit reports for up to seven years. This negative credit history can make it difficult to obtain future credit, secure other loans, or even rent housing.

The Foreclosure Process

A HELOC default can lead to foreclosure proceedings by the lender. Foreclosure is a legal process through which the lender takes possession of the property to sell it and recover the outstanding debt. The process begins when payments are missed for a sustained period, often 90 to 120 days, after which a formal Notice of Default (NOD) is filed with the court or county recorder’s office. This notice warns that the borrower is in serious delinquency and the lender intends to foreclose.

Following the Notice of Default, there is a pre-foreclosure period, which allows the borrower to cure the default by bringing the account current. The length of this reinstatement period varies, but it is a window for the borrower to resolve the debt and avoid further legal action. If the default is not cured, the lender proceeds with the legal process, which can be either judicial (requiring court action) or non-judicial. Regardless of the type, the process culminates in a public sale of the property, typically an auction, where the home is sold to the highest bidder. The borrower loses ownership of the home, and eviction proceedings may follow if the property is not vacated.

Financial Implications After Foreclosure

Even after a home is sold through foreclosure, financial consequences can persist for the borrower. One significant outcome is a deficiency judgment, which occurs if the foreclosure sale proceeds are less than the outstanding HELOC balance. For example, if a HELOC balance is $70,000 and the home sells for $55,000, the lender may pursue a judgment for the $15,000 difference. HELOCs are often considered “recourse loans,” meaning lenders can pursue the borrower personally for any remaining debt after the collateral is sold. While state laws vary regarding deficiency judgments, a lender may sue the borrower to collect this amount, potentially leading to wage garnishments or other asset seizures.

Another financial implication arises from debt forgiveness. If any portion of the HELOC debt is canceled or forgiven by the lender, this amount could be considered taxable income by the Internal Revenue Service (IRS). Borrowers may receive IRS Form 1099-C, “Cancellation of Debt,” reporting the forgiven amount. However, certain exclusions may apply, allowing some taxpayers to exclude canceled debt from taxable income. A foreclosure leaves a lasting mark on the borrower’s credit report for up to seven years, significantly hindering the ability to secure future housing, loans, or other forms of credit.