What Happens If You Default on a Home Equity Investment?

If you are concerned about defaulting on a home equity investment, you may be unsure what counts as default and what it means for your home. Unlike a mortgage or HELOC, default usually results from contract violations or failure to settle the agreement as required, not from missed monthly payments. This article explains what triggers HEI default, the risks involved, and steps you can take to stay in control.

In this article. (Skip to...)

• HEI default meaning
• Losing your home
• Default triggers
• Default enforcement
• Facing HEI default
• Settlement options
• FAQs

What does defaulting on an HEI mean?

Defaulting on a home equity investment means failing to meet the terms of your agreement, which may let the provider demand repayment or take legal action. Since HEIs do not require monthly payments, default usually happens if you cannot settle the agreement at a trigger event, such as a sale, refinance, or end of term, or if you violate key contract obligations. Because settlement is often a lump sum based on your home’s value, default can occur years after you receive the initial funds.

Can you lose your home if you default on an HEI?

Yes, you could lose your home if you default, as most HEIs are secured by a recorded lien. This lien gives the provider a legal claim that can be enforced if the agreement is not satisfied. Even without monthly payments, the lien lets the provider take legal action to recover what is owed. Marketing that highlights “no monthly payments” may create a false sense of security, but the risk remains because of the lien and your obligation to settle the agreement.

What triggers HEI default?

Several contract violations can trigger default under a home equity investment, many unrelated to monthly payments. HEI agreements include settlement timelines, property requirements, and lien restrictions that must be followed throughout the term. Missing a key obligation or breaking a contract rule may cause default, even if you have not missed a traditional payment.

1. Missing the end-of-term settlement

Each HEI has a set term, and at the end of that term, you must settle the agreement as specified in the contract. Settlement usually involves selling the home, refinancing, or paying the provider based on the agreed formula tied to your home’s value. If you cannot complete one of these options by the deadline, the agreement may enter default because repayment is due.

2. Violating occupancy or maintenance requirements

Most HEI contracts require you to keep the home as your primary residence and maintain it in reasonable condition. Moving out without approval, renting the property in violation of the agreement, or allowing major deferred maintenance can break contract terms. Providers include these rules because their return depends on the home’s future value, which is directly affected by occupancy and upkeep.

3. Failing to pay property taxes or insurance

HEI providers usually require you to keep property taxes and homeowners’ insurance current throughout the agreement. Unpaid taxes can result in senior liens, and lapsed insurance increases the risk of property loss, both of which threaten the provider’s secured interest. Falling behind on taxes or insurance is a common and serious default trigger.

4. Unauthorized liens or title changes

Most agreements prohibit adding new liens or changing title ownership without the provider’s written consent. Taking out a new HELOC, second mortgage, or transferring ownership can change lien priority and reduce available equity at settlement. Recording new debt or modifying the title without approval may be a contract violation and trigger default.

How HEI default differs from mortgage or HELOC default

• No monthly payments to miss. With a mortgage or HELOC, default usually begins when you fall behind on payments. In contrast, an HEI has no monthly payments; default happens through contract violations or not meeting the settlement obligation at the end of the term.
• Settlement obligation vs. debt repayment. A traditional loan requires repayment of principal plus interest, while an HEI requires repayment of the original investment plus a negotiated share of your home’s appreciation, which may be much larger if your home’s value rises significantly.
• Lien position and foreclosure rights. HEI providers usually hold a junior lien behind the primary mortgage, so they are paid after senior debts in a sale. They can still take legal action to enforce their lien and protect their investment.

What happens when an HEI provider enforces a default?

The enforcement process usually follows a standard pattern, though details may vary by provider and state law.

Notice and cure period

First, you will receive a written notice of default. Most contracts include a cure period, usually 30 to 90 days, during which you can resolve the issue and avoid further action. This period is your chance to address the default.

Demand for full settlement

If you do not cure the default within this period, the provider can demand immediate payment of your full settlement amount. This includes their original investment plus their share of your home’s current value, which may be tens of thousands of dollars.

Legal action and lien enforcement

If demands go unanswered, providers can file lawsuits to enforce their lien. Legal fees and court costs are often added to the amount owed, increasing your total liability.

Forced sale or foreclosure

As a last resort, the provider can force the sale of your home to recover their investment. The exact process depends on state law, but the outcome is the same. You could lose your home.d

How do HEI defaults affect your credit score?

HEI providers can report defaults to credit bureaus, which may damage your credit score. A forced sale or foreclosure can affect your credit for seven years or more, making it harder to qualify for future loans. Even if you resolve the default before losing your home, negative marks may stay on your credit report for years.

How does defaulting on an HEI affect your primary mortgage?

Your primary mortgage lender is paid first from any sale proceeds, providing some protection. If your home sells for less than the combined total of your mortgage balance and HEI obligation, you may face a deficiency judgment for the remaining amount. The financial stress of an HEI default can also make it harder to keep up with your primary mortgage payments, which can cause more problems.

What to do if you are facing HEI default

Taking action early gives you the most options. Delaying can make the situation worse.

Review your HEI contract terms

Review your agreement carefully. Identify what counts as default, the available cure periods, and the remedies the provider may pursue. Understanding these details is the first step.

Contact your HEI provider early

Do not wait for a default notice. If you are struggling to meet your obligations, contact your provider as soon as possible. Many providers prefer to resolve issues directly instead of incurring legal expenses.

Explore refinancing or selling your home

Refinancing into a traditional mortgage lets you pay off the HEI on your own terms. Selling voluntarily gives you control over the process and usually preserves more of your equity than a forced sale.

Work with a HUD-approved housing counselor

Free counseling is available through HUD-approved agencies. These counselors can help you understand your options and may help with negotiations.

Seek legal advice

If you believe your HEI terms are unfair or you are facing legal action, consult an attorney. Some courts have found certain HEI practices deceptive, so you may have legal protections you do not know about.

Options if you cannot pay your HEI settlement

If the settlement amount is unaffordable, there are still options.

• Negotiate an extension or modified terms. Some providers may extend your term or adjust settlement terms if you communicate your situation early.
• Sell your home and settle the obligation. A voluntary sale gives you control over the timing and usually results in a better price than a forced sale, with remaining equity paid to you after debts are settled.
• Refinance into a traditional mortgage. If you qualify and have enough equity, refinancing can turn the HEI obligation into a loan with predictable monthly payments.
• Request a partial buyout if available. Some providers let you buy back part of their share before the full term ends, depending on the contract.

How to avoid HEI default before it happens

Prevention is easier than dealing with default after it happens.

• Understand your full obligations before signing. Read the contract and ask questions about anything that is unclear.
• Plan for the settlement date from the start. Know when your term ends and start preparing well in advance.
• Keep property taxes and insurance current. Set up automatic payments or escrow accounts to avoid missing them.
• Maintain your home's condition. Regular upkeep protects your equity and keeps you in compliance with your agreement.
• Monitor your home's value. Track your potential settlement obligation to avoid surprises.
• Start planning for settlement several years in advance. Give yourself time to refinance, save, or sell on your own terms.

Is a home equity investment right for you?

HEIs can be suitable for homeowners with substantial equity who cannot qualify for traditional loans because of credit or income challenges. The absence of monthly payments provides cash flow flexibility that some homeowners value.

However, HEIs are not suitable for everyone:

• Potentially good fit: Homeowners with lower credit scores and strong equity, those who prefer no monthly payments, and individuals comfortable sharing future appreciation.
• Be cautious if: You expect significant home appreciation, are risk-averse, or are uncomfortable with a large balloon payment at the end.

Before signing an HEI, compare it with alternatives such as HELOCs, home equity loans, or cash-out refinancing. Knowing all your options helps you make the best choice for your situation.

FAQs about defaulting on an HEI