The Big Freeze: Tips for Dealing with a Frozen or Reduced HELOC
One result of the credit crunch and the economic recession has been the freezing or reduction of home equity lines of credit (HELOC) by banks. A HELOC is a form of revolving credit in which the borrower's home serves as collateral. And while this is not a surprising move by banks looking to be more conservative with their lending policies during tough times, many home owners counting on this credit will face some challenges if their HELOC is reduced or frozen.
To help you deal with these challenges, the US Treasury Department and the Federal Reserve each released some tips for homeowners in this situation. The following is a summary of these tips.
Read Everything to the Letter – Your HELOC lender must provide you with a written notice if it has frozen or reduced your HELOC no later than 3 business days after the freeze or reduction. Information about any other changes to your HELOC must be included as well, so read everything mailed to you from your lender.
Pick Up the Phone – Your lender has the right to freeze or reduce your HELOC, even if you have a good payment record. Some common reasons for the action are a decline in the value of your home, a negative change in your financial situation, or a negative change in your credit score. Contact your lender if you have questions or concerns about a freeze or reduction.
Communication is Key – The required notice to freeze or reduce your HELOC will likely contain specific reasons for the action. Find out the reason, and see if you can take any steps to reinstate your HELOC. The bank might not know about home improvements you made that might affect the value of your home. It might not be aware that you or your spouse got a new job, took a second job, or made some substantial investments that affect your finances. If your credit took a hit, investigate ways to improve your credit and communicate your efforts to your bank.
Don't Be Afraid to Ask – Your lender must reinstate your credit privileges when the conditions permitting the freeze or reduction no longer exist. You may need to request in writing to have your line of credit reinstated, so be sure to find out why your HELOC was frozen or reduced. Once your lender receives your written request, they must promptly investigate and determine whether your HELOC can be reinstated.
Be Prepared for Fees – There may be some fees involved to cover the costs for an appraisal and/or credit report when a bank considers your request for reinstating your HELOC. However, you cannot be charged a fee to reinstate your HELOC once the condition that caused the freeze or reduction no longer exists.
If you or someone you know has questions about HELOCs, credit repair, purchasing or refinancing a home, please don't hesitate to give us a call.
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