HELOC Borrowers Can Challenge Lenders When Credit Is FrozenBeth Orenstein
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As property values retreat and the number of foreclosures rises, lenders are growing leery of home-equity lines of credit (HELOCs.) As a result, in some areas of the country where home prices have dropped more than 10% and the foreclosure rate is particularly high, lenders have been freezing lines of credit. Countrywide, Bank of America and Citibank are among the major lenders who have suspended HELOCs or are thinking of doing so. Borrowers with HELOCs are likely to receive letters from their lenders telling them of the freeze. The letters may go to all borrowers in an area, or just those who have missed a payment, had a change in their credit score, or whose homes, because of declining values, are not worth as much as their debt. "We have seen it happen to borrowers with 800-plus credit scores and loan-to-value ratios of 50% to 60%," says Mark Frassica of EquityReach Mortgage Solutions in Arroyo Grande, California.
HELOC Agreements Often Allow Lenders to Change TermsIf borrowers receive a letter telling them that their HELOC has been suspended, they should check the agreement for their line of credit. Chances are it contains a clause that allows the lender to do so, Frassica says. However, borrowers don't have to sit back and take it, he says. "A huge percentage of people do nothing and accept it, when really they should challenge it, especially if they need the money for a medical emergency or if they are in the middle of a construction project," Frassica says.
HELOC Borrowers Should Speak Up, Prove their PositionThe good news is that HELOCs can be reinstated. "It's up to the discretion of the bank or the lender," Frassica says.
What the borrower needs to do is call his HELOC lender and find out why his HELOC was suspended, says Fred Solomon of Solomon Financial in Irvine, California. Borrowers must insist on speaking directly to someone with authority and not just whoever answers the telephone, Frassica says.
Before calling, HELOC borrowers should check their credit reports to see if there is a problem or mistake. An error or one 30-day late payment on a primary mortgage could have caused the lender to react. If borrowers can explain the issue and prove their credit-worthiness, their HELOC lenders might listen, Solomon says.
HELOC Can Be Restored by Showing Home's Current ValueHELOC borrowers may need to have their home reappraised, Solomon says. If the home equity loan was frozen because home prices in the area declined, a local real estate agent will be able to call up comparable sales and prove the home still has considerable value. "You may have to provide them with three, four or five comps to show them what the current value is," Solomon says. "That's part of the process of getting the HELOC unfrozen." An appraisal might cost $200 to $300, "but it may be worth it to protect your credit and especially if you need the cash from your home equity," Solomon says.
Other Options: Asking for a Lower Line of Credit, Seeking HELOC ElsewhereIf the lenders won't budge, borrowers can try to negotiate a lower line of credit or try to consolidate their primary mortgage and their home equity loan. When the housing market was booming, lenders would grant home equity loans up to 100% of the value of the home. Now their top is 85%, if that much in most areas. If the borrower has solid credit and decent home equity, a new loan and starting over may be an option, too, Solomon says.
- Frassica, Mark, Interview by Beth W. Orenstein, 9 October 2008
- Mortgage Bankers Association
- Solomon, Fred, Interview by Beth W. Orenstein 8 October 2008
About the Author
Beth W. Orenstein, of Northampton, Pennsylvania, is a freelance real estate writer. A graduate of Tufts University, she majored in English.