A home equity line that lets you borrow money as you need it can be a great way to pay for a remodeling project or an education — unless the lender cuts off your line in the middle of a home improvement or when your kid is only halfway through college.
When a Lender Can Close Your Credit Line
Although you may have paid hundreds of dollars in fees to open your home equity line, chances are the fine print says the bank doesn’t need your permission to freeze, reduce, or shut down your line if:
- The value of your home falls significantly.
- You fail to make your payments or pay late.
- You get divorced and you can’t afford the payments on your own.
- Your financial condition worsens so that you can no longer afford the payments.
- You move out of your home. A non-owner-occupied home is risky to a lender.
- You take out another mortgage.
Worse yet, the lender can wait up to three business days to send you a letter telling you. So, it can close your HELOC on a Friday and wait until the following Wednesday to mail you a letter saying you’re cut off and why. The checks you wrote on Tuesday thinking you still had your HELOC? They’ll bounce.
What are Your Options?
Contact your lender to ask what you can do to restore a credit line. Here are few things to try:
1. If the lender says your home value has fallen “significantly,” prove it hasn’t.
Federal law says banks can shut off your HELOC credit spigot when there’s a “significant” decline in your home value. “Significant” means the difference between your credit limit and the home equity you had when you got the loan has fallen by 50%.
Here’s how the significant decline formula works:
Home value when you got the HELOC: $100,000
What you owe on the home purchase mortgage: $50,000
Your HELOC: $30,000
Your original home equity: $20,000 ($100,000 minus your $50,000 outstanding mortgage and minus your $30,000 HELOC).
A significant decline happens if you lose 50% (half) of your original $20,000 in home equity, or $10,000.
So, if your $100,000 home declines in value by $10,000 and is now worth only $90,000, the lender can end your HELOC.
What to do: Contact the REALTOR® who sold you your home. She’ll be able to pull recent sales prices for comparable homes for you.
If that data shows your lender is undervaluing your home, you’ll have to spend several hundred dollars for an appraisal. Ask your lender for a list of its approved appraisers (an appraisal from an appraiser the bank doesn’t trust won’t fly). Hire an approved appraiser who knows your neighborhood, if possible.
2. If you failed to make your payments, pay on time from now on.
If you’re making late payments, your lender can freeze your HELOC.
What to do: Set up an automatic payment that drafts what’s due directly from your bank account, or just pay the bill the day you get it even if the due date is weeks away.
Find out how many months of on-time payments you need to make to rebuild your creditworthiness and get your line reinstated, so you’ll know when to call and ask the lender to reopen your HELOC. How long it takes depends on such factors as how late you were and how many times you were late.
3. If you get divorced, reapply for the loan.
Your lender can’t shut your HELOC down just because you got divorced, but it can ask you to reapply for the HELOC if you originally used your spouse’s income to qualify and will now repay using only your income. It can give you a limited time to reapply, and can’t freeze the HELOC while your application is pending.
What to do: Reapply and prove you can afford the HELOC on your own.
4. If your lender says you can’t afford the HELOC, see if there’s an error.
Your lender can pull your line if it thinks you can’t or won’t make the payments. But, if you can show there’s a mistake in your credit report or the lender is wrong about your income or debts, you can fight back.
What to do: Order a copy of your credit report. Look for and fix mistakes. Share your results with the lender.
Make sure the lender knows about all your income and has listed your debts correctly. Ask what debt-to-income ratio it wants you to have, then calculate yours. You can lower your debt-to-income ratio by paying off outstanding debt (like credit card balances) or by earning more income.
Protect Yourself After a HELOC Freeze
Whether you succeed in getting your line defrosted, you should:
Keep an eye on your credit. The freeze may lower your credit score so check it every month or so.
Related: Tips to boost your credit score
Fight back if your monthly payment goes up. If your lender freezes your line, it can’t increase your payment just because it feels like it. Many HELOCs have a 10-year period where you make withdrawals and repay interest, but not the money you borrow (principle). At the end of the 10 years, you start repaying the money you borrowed along with the interest and that makes your payments go up.
When you lender freezes or reduces your HELOC, you still get your 10-year period of smaller payments. All bets are off, however, if you:
- Lied on your HELOC application.
- Don’t make your monthly payment.
- Do something that hurts your home (like purposely damaging it).
- Take out another loan that would take priority over your HELOC.
Look for another lender. If you can’t get your lender to restore your HELOC, shop around for a lender that sees things differently. You can use a new HELOC to pay off your old HELOC, or if you have enough equity, refinance your first mortgage and use proceeds from that to pay off the old HELOC.