Home Equity Lines of Credit (HELOCs) may be difficult to obtain in today’s market, but not too long ago, everybody had one. Recently, a series of closings were delayed in our office due to issues with HELOCs, and I expect that dealing with HELOCs will only get worse.
There are several reasons why HELOCs often cause title nightmares, and keeping good records can help avoid settlement delays.
Issue #1: Funds on a HELOC can be redrawn
Unless a request to close and terminate the account is made, the account remains open. This differs considerably from a traditional mortgage. When a first mortgage is paid off on a property, since the loan cannot be redrawn, the mortgage is automatically closed and a release is issued (or is supposed to be issued, but that is a headache for another blog).
However, with a HELOC, even if all of the borrowed funds are repaid, the account does not automatically terminate. This is because the funds on a HELOC can be redrawn. So unless a request to close the account accompanies the payment in full, the HELOC will remain open.
Most commonly the issue is as follows: the HELOC was paid off six years ago but the lender was never instructed to close the account, so now a release must be obtained. This scenario is not too bad, as long as the HELOC lender can be found (with the recent bank takeovers, old accounts can sometimes be difficult to track). Still, it can cause settlement delays, since often the HELOC lender responds that it needs time to research the information.
Issue #2: HELOC is a lien on the property
Even if a HELOC was never used, it is still a lien on the property. This issue has arisen countless times. When we ask the seller of a property if there are any mortgages/liens on the property, the response is no. However, the title search reveals a HELOC taken out eight years ago, so we call the seller who says, "I never used that HELOC and I have no information on it."
If there is no monthly payment due, the HELOC lender does not send a monthly statement, so it is possible to have never used a HELOC, never received a bill, but still need to close the account and obtain a release. Once again, keeping good records can save the day, but often sellers have little to no record of a HELOC that was never used so, once again, the settlement is at the mercy of the HELOC lender’s research team.
Issue #3: Title insurance not typically required on a HELOC
The seller had a HELOC with Bank A for $50,000, then three years later obtained a new HELOC from Bank A for $100,000. Since HELOCs typically do not require title insurance, no title company was used for the new HELOC, and Bank A never bothered to release the original HELOC.
Often the seller believes that no new lien was recorded, just a modification, but that’s usually not the scenario. Now a release needs to be obtained for the first lien for $50,000.
The key point here is to keep good records. For whatever reason, our experience is that homeowners tend to treat HELOCs with less regard than mortgages, and tend to not keep good records. Typically issues with HELOCs can be resolved, but they do often cause settlement delays.