3 Consequences of a Home Equity Loan Default

Home equity loan default is one of the most serious loan transgressions you can make. Any default will negatively affect your financial situation. A large loan default, though, will multiply the problems.

#1 Credit Penalties

Your credit score will drop sharply with a home equity loan default. Your lender will report each missed payment initially, knocking your score down for a very long time. When the debt enters the final default stage, your score will take the biggest hit. A default will also show clearly on your credit history.

#2 Lawsuits and Fines

You are not clear of the debt just because you defaulted. Even if you posted no collateral, the lender may still attempt to collect from you. The most common attempt to collect is made through a law suit. You will not be able to avoid appearing before a judge to resolve the debt if charges are made against you.

#3 Foreclosure

Many people make the mistake of thinking they are safe from foreclosure as long as their primary mortgage is in good standing. In fact, your subordinate home equity lender may purchase your primary mortgage if you default with them. This means they can force your home into foreclosure even if your mortgage payments have been made.

What's the penalty for an FHA home equity loan default?

Going through an FHA home equity loan default can be a difficult financial situation, and it will most likely result in penalties for the borrower. While there is no specific penalty that will be charged by the FHA, you will face other issues. One of the biggest penalties is that you will not be able to apply for another FHA loan for three to four years. If you want to purchase another home in the future, this can make it difficult. Another penalty is that you will have to pay interest rates that are much higher than average at that point. 

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