Although home equity lines of credit (HELOCs) are tough to come by in today’s market, they were formerly commonplace. A series of closings in our office were recently delayed due to HELOC concerns, and I predict that the problem will only grow worse.
HELOCs are notorious for causing title issues for a variety of reasons, and keeping solid records might help you prevent settlement delays.
Issue #1: Funds on a HELOC can be redrawn
The account will stay open unless a request to close and terminate it is made. This is not the same as a standard mortgage. Because a first mortgage cannot be redrawn, when a property is paid off, the mortgage is automatically closed and a release is granted (or is supposed to be issued, but that is a headache for another blog).
Even if all of the borrowed monies are repaid, the account with a HELOC does not immediately close. This is due to the fact that a HELOC’s funds can be redrawn. The HELOC will stay active unless a request to terminate the account is sent along with the entire payment.
The most prevalent problem is that the HELOC was paid off six years ago, but the lender was never told to cancel the account, necessitating the need for a release. As long as a HELOC lender can be located, this circumstance isn’t too horrible (with the recent bank takeovers, old accounts can sometimes be difficult to track). Even so, because the HELOC lender frequently responds that it requires time to study the material, it can cause settlement delays.
Issue #2: HELOC is a lien on the property
A HELOC is still a lien on the property even if it was never used. This topic has come up numerous times. When we ask a seller if there are any mortgages or liens on the property, they always say no. However, a title check reveals an eight-year-old HELOC, prompting us to contact the seller, who states, “I never used that HELOC and I have no information on it.”
The HELOC lender does not issue a monthly statement if there is no monthly payment due, thus you could have never used a HELOC, never received a bill, yet still need to shut the account and obtain a release. Keeping good records can rescue the day once again, but many sellers have little to no documentation of a HELOC that was never used, thus the settlement is once again at the mercy of the HELOC lender’s research team.
Issue #3: Title insurance not typically required on a HELOC
The seller had a $50,000 HELOC with Bank A, then a second $100,000 HELOC with Bank A three years later. No title company was utilized for the new HELOC because HELOCs normally do not require title insurance, and Bank A never bothered to release the prior HELOC.
The seller frequently feels that no new lien was registered, only a revision, but this is rarely the case. For the $50,000 first lien, a release must now be acquired.
The most important thing to remember is to keep meticulous records. For whatever reason, we’ve found that homeowners value HELOCs less favorably than mortgages, and that they don’t keep good records. HELOC problems are usually resolvable, but they do cause settlement delays.
Do you need insurance for a HELOC?
When you take out a mortgage or a home equity loan, your lender will need you to purchase enough insurance to cover the loan’s outstanding sum. HELOC insurance requirements are distinct and are not based on the amount outstanding. Rather than the sum owed on the line, you must purchase enough homeowners insurance to cover the HELOC line amount. You must obtain enough insurance coverage to cover both the first mortgage and the HELOC line amount if you have a second lien HELOC.
What regulation covers HELOCs?
Let’s chat about Reg Z before we enjoy the weekend! We are occasionally asked about the disclosures required for home equity lines of credit (HELOCs). HELOCs are unique in that they are open-end lines of credit governed by Reg Z’s Subpart B, but they also have their own set of requirements under section 1026.40. Please note that while both regulations cite each other, section 1026.40 is more thorough and includes helpful examples of rule implementation in its discussion. A few of the required disclosures will be discussed in this blog. Secure your seatbelts!
In general, HELOC application disclosures must be presented along with or at the same time as the application is given to the member. Section 1026.40 specifies this (b). Many members nowadays prefer to apply for a HELOC online rather than picking up a printed application with disclosures. What is the rule’s approach to this practice?
The commentary to section 1026.40(a) contains the requirements for electronic applications (1)
Is escrow required for HELOC?
Yes, an escrow account can be used with a HELOC loan. Any loan type (e.g., commercial, residential, HELOC) can have/require an escrow account, subject to any state law limits. Consider the fair lending implications if you’re forcing it rather than offering it in response to a customer’s request. It’s critical to make sure you’re not requiring escrow on an illegal basis, and that you’ve established escrow criteria that all borrowers must adhere to.
Do HELOCs have closing costs?
When all lender costs and third-party services are taken into account, a home equity loan or HELOC will typically cost between 2% and 5% of the overall loan amount or line of credit. These may be covered by the lender under “no-fee” HELOCs and home equity loans, but keep in mind that the interest cost of your loan may already include these fees. When comparing offers from different lenders, keep in mind to compare APRs rather than just interest rates.
How soon can you get a HELOC after purchasing a home?
How Soon After Buying A House Can You Get A HELOC? 30-45 days after the acquisition of a home, a HELOC can be obtained. Borrowers must, however, meet all of the lender’s conditions, which include having 15-20 percent equity in their property, a decent repayment history, and more.
What disclosures are required for HELOCs?
The Home Equity Line of Credit Early Program Disclosure, Account Opening Disclosures or credit agreement, and the billing statement are three interdependent disclosures that are vital to the home equity line of credit product.
Does a HELOC require a closing disclosure?
The lender must provide you with the Closing Disclosure at least three working days before the loan closes. This three-day period gives you the opportunity to compare your final terms and prices to those estimated in the Loan Estimate you obtained from the lender previously. Before you get to the closing table, you have three days to ask your lender any questions you have.
If you apply for a reverse mortgage, you will not receive a Closing Disclosure. Instead of the Closing Disclosure, you will receive two forms: a HUD-1 Settlement Statement and a final Truth in Lending Disclosure for those loans. You will not receive a HUD-1 or a Closing Disclosure if you apply for a HELOC, a manufactured housing loan that is not backed by real estate, or a loan through some types of homebuyer assistance programs, but you should receive a Truth-in-Lending disclosure.
Does ECOA apply to HELOCs?
When a creditor suspends a HELOC or cuts the credit limit due to a large decrease in the value of a property, both the ECOA and the FCRA have adverse action provisions that may apply.
ECOA Requirements
“An unfavorable change in the terms of an account that does not affect all or nearly all of a class of the creditor’s accounts,” according to the regulation.
Is a home equity loan a second payment?
A home equity loan is a second mortgage that allows you to borrow against the value of your property. A home equity loan will give you a lump sum payment, similar to a personal loan, and the interest rate will be fixed.
A HELOC, on the other hand, permits you to borrow lesser amounts as needed and has a variable interest rate. In order to qualify for a home equity loan, you must have at least 20% equity in your property.
Here’s an example of how a home equity loan could be used to access equity: