What Happens to HELOCs After Foreclosure in California?

Find out if your HELOC lender can sue you for a deficiency in California if you lose your home to foreclosure.

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Question

My home in California is being foreclosed. I am underwater on the first mortgage and also have a HELOC. Will I owe either lender anything after the foreclosure?

Answer

So long as the foreclosure of the first mortgage is nonjudicial, you won’t owe that lender anything after the foreclosure. However, you may face a lawsuit by the HELOC lender (unless the first mortgage lender is the same as the HELOC lender or the HELOC falls under another exception under California deficiency judgment law).

(Learn more about California Foreclosure Laws and Procedures.)

Understanding HELOCs

A HELOC (home equity line of credit) is a loan where the borrowers draw upon their home’s equity. The loan is set up as a line of credit with a maximum draw, rather than for a fixed dollar amount. Most HELOCs are second (or third) mortgages that are typically taken out sometime after you purchase the property. However, a HELOC can be a purchase-money loan (where you took out the loan to buy your home).

(Learn more about HELOCs in Nolo’s article Home Equity Loan and HELOC Basics.)

Deficiency Judgments in California

In California, a deficiency judgment is not allowed following a nonjudicial foreclosure. Since most residential foreclosures in California are nonjudicial, your first mortgage lender will most likely use this method to foreclose. (To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?)

If your foreclosure happens to be judicial, the lender can seek a deficiency judgment, but not if the loan was:

  • a purchase-money loan (a loan used to buy a one to four unit dwelling, which you occupy)
  • a seller-financed loan (you took out the loan from the person or entity selling the property to you), or
  • a refinanced purchase-money loan.

(Learn more about when a lender can seek a deficiency judgment against you in Nolo's article Deficiency Judgments After Foreclosure in California.)

Lawsuits by Junior Lienholders

After a first mortgage is foreclosed, a junior lienholder (like the HELOC lender) may sue you for the outstanding balance of its loan. There are a few exceptions, it cannot sue you if:

  • the lender that foreclosed the first mortgage is the same lender as the HELOC, or
  • the loan falls into one of the above exceptions (purchase-money loans, seller-financed loans, or refinances of purchase-money loans).

If none of these exceptions apply in your circumstances, you may face a lawsuit from the HELOC lender to collect the debt. Once the lender gets a judgment in the lawsuit, it may collect the amount owed by doing things such as garnishing your wages.

(Learn about methods that creditors can use to collect judgments and California Wage Garnishment Law.)

(To learn the ins and outs of the foreclosure process, visit our Foreclosure Center.)

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