Home Equity Loans – How Banks Foreclose

By Anthony Read

Texas was the last state to allow home equity loans. That is, a loan that gives you cash taken against the equity in your home.  This is distinct from a purchase money loan where you borrow money to buy the house or a refinance where you borrow just enough to pay off the old mortgage.

If your loan is NOT a Home Equity loan, there is a non-judicial process for foreclosure mostly involving notification followed by a sale.  Home Equity loans, by contrast, can only be foreclosed with a judicial process – that is a judge has to sign an order allowing the foreclosure.

The first step in the process is to send you a default letter stating you are behind in your payments and that you have (usually) 30 days to bring the loan current.  The default letter usually threatens to “accelerate” your loan if you do not bring it current.

Acceleration sometimes takes place after that 30 day period, but it can take longer for the bank’s lawyers to send the letter.  Acceleration is a demand that you pay the entire balance of the loan or face foreclosure.  A pointer to remember here is that even if the loan has been accelerated you can almost always still pay just the arrears to reinstate the loan.

After acceleration, the bank’s lawyers must file suit to obtain an order to foreclose.  The suit must be served by constable or process server on the last address the bank has on file for you.  This is usually the property address.  The title of the suit will be IN RE: <property address>. DO NOT IGNORE THIS SUIT.  This is the easiest point in time to delay foreclosure.  This is also a really good time to hire a lawyer to protect your rights.

You have until the first Monday after 38 days have passed to answer the suit.  If you do not file an answer, the bank’s lawyer can apply for a default or automatic win.  Assuming a default or a loss, the bank’s lawyer, armed with the order, can start the rest of the foreclosure process.  All foreclosures happen on the first Tuesday of the month.  You have to be given 21 days’ notice before the foreclosure.  It is still usually possible, even after notice of sale, to bring your loan current if you have the funds – the acceleration may mislead you into thinking you have to have the entire balance of the loan.

If there is a title dispute or other irregularity in the foreclosure, it is possible to stop the foreclosure right up to the day before.  All you have to do is to file a lawsuit challenging the foreclosure or title and notify the bank’s lawyer and the foreclosure is automatically stayed.  The filing and notification must take place by 5:00 PM the Monday before the foreclosure.

Unless the sale is stopped, the bank’s lawyer is likely to sell your house to highest bidder (often the bank).  Within a few days or weeks, you will receive a notification to vacate in 3 days.  This does not mean you have to move in 3 days.  It means that if you do not move in 3 days, the buyer can file suit to have a Justice Court evict you.  This process can take days or weeks depending on how it is handled.

Again, Texas Home Equity loans provide some extra protections for home owners against foreclosure.  It is a longer process and it takes a judge’s approval.  The description above is general in nature.  You should consult a qualified attorney to determine exactly what your rights are with regard to your homestead and foreclosure.