When seller financing goes awry

Borrowers' secret second loan raises foreclosure fears
Published on Mar 2, 2009

DEAR BENNY: We carry the first and only mortgage on our married daughter's house, which is approximately $200,000. Without our knowledge they obtained an equity loan on the house for $100,000. Our son-in-law has since lost his job and we are carrying them on the first mortgage. If he defaults on the equity loan, what effect does this have on us? --Joan DEAR JOAN: An equity loan -- usually called a "home equity loan" or a "HELOC" -- is a second mortgage (in many states it is called a "deed of trust"). And basically, as with a first trust, the HELOC lender can foreclose on the property if their loan is in default. However, the second lender must advise the first trust lender (which you are) of the pending foreclosure, and that would give you the right to pay off the second so as to keep the property. Alternatively, if you should opt not to make the payment and the house is sold, you will receive your proceeds first because you are in first trust ...