What is the Difference Between a 2nd Mortgage and a Home Equity Line of Credit (HELOC)?

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A true “closed ended” second mortgage is one that is usually used to typically purchase the home and used as additional financing. While some seconds are not always used at purchase, in either event they are loans that are only secured by the property and may be wiped out if a first forecloses and there is not enough equity to pay them anything.

A HELOC is completely different in that, while it does include a lien on a property, it is still a line a credit that can stay open even if the lien is wiped out in a foreclosure. Many inexperienced agents do not understand this, and HELOC’s need special attention in order to do a successful short sale with full release for the borrower. Be sure to question where you short sale agent understands the difference between these two types of loans.

Even though the new law that went into effect on July 15th of 2011 wipes about the ability of the lender to be able to pursue the deficiency after a short sale, it does not change their ability in a foreclosure. Because of this it is more difficult to get a HELOC, or “recourse loan” approved in a short sale scenario and you need to work with an experienced short sale broker.