Most HELOC holders don’t realize their lender can legally “freeze” their HELOC.
This is when the homeowner can no longer access the line of credit.
A HELOC freeze can be unsettling: many homeowners open up HELOCs as emergency funds or use them to finance ongoing projects.
What should you do if you receive a freeze letter from your lender?
When Can a Lender Freeze Your HELOC?
The good news is that the lender can’t freeze your HELOC just because they feel like it. Regulation Z spells out lawful circumstances.
Decrease in Home Value: The home must experience a “significant decline” in value. This is defined as a 50% decline in remaining home equity. For example, a $400,000 home has a combined primary mortgage and HELOC limit of $300,000, leaving it with $100,000 in remaining equity. The home value must drop $50,000 (50% of the $100,000 equity) for the lender to issue a freeze.
Change in Financial Circumstances: The lender must detect both the following. 1) a change in the borrower's finances such as a job loss or lower credit score, and; 2) the lender's belief that the borrower won't be able to make payments. The lender does not have to submit evidence of criteria on which it based the decision.
Failure to Meet an Obligation of the Loan: Examples are that you missed payments, moved out of the home that was originally a primary residence, or opened another loan that may supersede the HELOC.
You Hit the Maximum Interest Rate: For example, your state law caps home equity rates at 15%. The lender can freeze your credit line if your loan would have exceeded this level if not for the external cap.
At the Borrower’s Request: A lender must suspend further draws if the consumer requests it. For example, divorcing couples may voluntarily freeze a HELOC to keep the other party from drawing funds until the divorce is final.
Can The Lender Call the Loan Due?
According to Regulation Z, the creditor may not reduce your credit line below the existing balance. So if you owe $100,000 on the HELOC, the lender can’t cut your credit limit to $50,000 and make you pay the difference.
Certain loan provisions could allow the lender to call the loan due, such as a “due on sale” clause. But the lender can’t impose this requirement as part of the credit freeze.
HELOC problems? Try a cash-out refinance to consolidate.
What Can You Do If Your HELOC is Frozen?
Regulation Z says that credit freezes should be temporary in nature. The lender should freeze HELOC borrowing “only while one of the designated circumstances exists.”
The lender must spell out the reasons for the freeze and how you can restore full use of the HELOC.
The lender is permitted to charge fees for reinstatement such as for a new appraisal or credit report. Here are action steps to take.
Prove Higher Value: If you’ve completed a remodel or know of recent sales in your area that support a higher value, you can request the lender re-investigate.
Check Your Credit: Pull your credit at AnnualCreditReport.com (a federally mandated free site) to see what may have caused a credit score drop. Fixing an error could bring your score back up to the lender’s acceptable level.
Prove Your Income: The lender may have received information about a recent job loss. If you’re back on the job, prove that you are still working and your current income.
Meet Loan Obligations: If you’ve met all loan obligations – you’ve made all payments, continued to live in the property, etc. – submit proof to the lender.
Refinance: Check your eligibility for a new HELOC with another lender. If you qualify, you can pay off this HELOC with a new one.
Do Nothing: If you don’t need the credit line, simply let the lender’s decision stand.
Get a Professional Opinion
Fortunately, there are hundreds if not thousands of HELOC lenders today. If one lender freezes your account, another one might issue you a new HELOC at better terms.
Check your options and get a second opinion if your HELOC has been frozen.
