As promised, here's our second installment. Last week we addressed the effects of a bad mortgage or foreclosed home. This week we will be addressing Home Equity Line's of Credit (HELOC) or Second Mortgages.
These are completely different in terms of how they typically report, as well as the level of responsibility we have to pay them. A second mortgage, or HELOC is secured by the property as well. For Instance, in the case of a second mortgage going bad, as well as a first mortgage going bad, if the house is foreclosed on, the original mortgage (consider 'senior') is paid first and the second mortgage is satisfied with what ever is left from the sale of the home as it transitions through the foreclosure process. However, if the second mortgage is not satisfied, or if there is a balance left over, after the sale of the property, the creditor holding the note can in fact pursue you for payment.
In short, a balance is usually reporting on a second mortgage or HELOC that has gone bad, where as it is typically NOT reporting after a first mortgage or 'senior' mortgage goes bad. Now, while we rarely see any type of further action in terms of a judgment it can happen. Regardless, with respect to qualifying for a mortgage, this balance typically needs to be satisfied by some means prior to qualifying for another mortgage. This may be satisfied by either payment in full, or some sort of settlement. What ever results in the balance showing $0. That is what the lender is most concerned about, $0 or $0 liability.
Additionally, an original account with an unpaid balance does actually affect the scores, as opposed to a collection account with a balance, which typically does not.
Then there's the case of 'age'...or, 'how old is this debt?' and that's an entirely different animal...which, makes me think we should cover this, in our next article...
It shall be titled, Time Barred Debts and Statute of Limitations! Or something to that affect.
Until then my friends, have a great weekend, be safe and hang in there, summer is almost here...
Ed-Jack Dvorak is National Affiliate Liaison at Credit Dr., a national credit restoration company. He works with clients and creditors to improve credit profiles.