My HELOC is Freezing…
I really didn’t want to go back to discussing homes and mortgages and the housing market – how depressing. But, this has come up over and over, so I wanted to address it.
We started to hear from stressed-out people in our circles over a year ago that their HELOCs were being frozen (yes, in almost all instances the lender is allowed to do that). Even before things really got crummy, lenders were worried about their exposure due to plummeting home values.
Each month since then, more HELOCs have either been cut or frozen so that people couldn’t borrow any more from them. This didn’t have anything to do with how good people’s credit was, their employment situation, etc.
Lenders simply ran their “Automatic Valuation” modeling tools, and if it told them that values dropped 20% in a certain region, people’s HELOCs in that region were next on the chopping block.
Honestly, in some areas and some situations, it would probably be difficult to argue with their decision. But in others you might get lumped in to a group when you really shouldn’t be.
If you are in the middle of a home-improvement project, you probably have the best chance at getting some of your credit line back. If you can show the bank where you are on your project, and how much more you need to finish (don’t ask for the whole thing back), they’ll probably grant it to you unless your home value has been hit really hard.
If you just want to maintain that “cushion” in case you lose your job or something bad happens, well, that is tougher. Of course, if you explain that to your bank, that isn’t good – they don’t want to be the cushion you lean on in bad times, as sometimes that cushion doesn’t get paid back. So, I would advise you to really think through your position before you call them…
Either way, if it is important to get back at least some of your credit line, you’ll want to get an appraisal done. Most lenders will only have the automated report to go on, so if your appraiser does a good job, that can make all the difference.
By the way – make sure that your appraiser plans to use very close (distance-wise) and very recent comparables. If they are old or distant, I can almost guarantee your lender will take one look, toss it, and then support their original decision to cut or freeze your HELOC.
Most appraisers left in business at this point are experienced and reputable and this shouldn’t be a problem…but be careful here or you’ll be out a few hundred bucks for the appraisal and still have a frozen HELOC.
As you know by now, I can ramble on pretty well. I’ll wrap up this part of the post by saying that if you are in this situation and you want further information, read this informative Los Angeles Times Article on HELOCs for more.
What About My Next Home Loan
This isn’t an urgent issue, but I feel it is worth a few lines to plant this idea in your head for the future.
Your next loan will be much more difficult to get than your last loan was. The days of a 620 credit score, “liar’s loan” with no money down are gone – probably (hopefully) forever.
So, even if it is months or years into the future, start making your life easier now:
- Get written documentation on everything you can. Your income documentation is most important here, but save anything having to do with your job, bonuses, reimbursements, commissions, promotions, etc. This is a big hot button for the new world of home loans.
- Save everything you can regarding your housing history.
- If you are renting an apartment or house, pay with a personal check in your name (not a money order or cashier’s check – trust me). Either get a copy of the cancelled check, or at least make sure you can do so in the future.
- If you are renting a room or paying rent to friends or relatives, again – pay by personal check, and ensure that they cash the check in a timely manner. (Yes, a landlord that waits a month or two before cashing your check can make it appear that you paid late if you just go off of your cancelled check. It isn’t common, but it does happen!)
- If you are not paying rent, you need to start. You might think that lenders would reward you for being smart and saving money before you buy a house, but this actually isn’t the case. They want to see proof that you are responsible enough to make your current rent payments before they’ll take a chance that you’ll pay your mortgage. You can pay a small monthly rent (did you guess…by personal check) to friends or family and be in much better shape.
- Last, if you are in a Lease Option or Land Contract (not too common, but you know who you are), PAY BY PERSONAL CHECK. The lenient requirements from the past are gone, and this is more than likely the only way a lender will allow this as an eligible housing history.
- Hopefully you already save your income tax returns and bank statements, but if you don’t, you should start now. You might also want to save your utility bills in case they are needed. (Too much of a special case to go into here, but can save lots of time and hassle down the road if you need them).
- Keep your credit score as high as possible. This is kind of obvious, but your credit score is going to be more important than ever to your next mortgage.
- Also pretty obvious, but start saving now. Nobody knows exactly where the “down payment line” will stabilize, but I can assure you that having more of a down payment in the bank will put you in a much better position. Don’t plan on getting a no-money-and-no-closing-cost loan any time soon.
- Make sure that you are “ready” to buy a house at least 60 days before you apply. That means having the money in the bank account that you’ll provide bank statements for. That means nothing new on your credit report whatsoever. Actually, this advice applies until after you close and have the keys.
Easy stuff. Just trust a guy that spent many years in the industry…and do it.
I’ll make you a quick promise – the final three parts in this series will not focus on anything else having to do with homes or mortgages. Deal?
Talk to me. Am I off base on anything here? I want to know what you think!
Scott
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