As banks re-evaluate loan portfolios based on rapidly collapsing home prices, they're also adjusting credit extended to homeowners through home equity lines of credit. Since most homes have lost significant value in recent months, and many homeowners are now "upside down" in their mortgages, it's not surprising that lenders are withholding HELOC credit. But it does come as a rude awakening; when borrowers suddenly have their longstanding home equity line of credit frozen, they naturally receive the news with a reaction of both shock and disappointment.
Defending your HELOC
If your HELOC gets frozen, there are ways to appeal the decision. First, contact the lender and find out exactly why they cut off your credit. The usual reason is that home prices in your area have plummeted, erasing previous equity. If you live in an area prone to foreclosures, for example, the proximity to those who are falling behind on their mortgage payments can make you the target of a HELOC freeze.
To argue your case, present a current appraisal from a licensed appraiser, or home sales data obtained from a realtor to verify that your particular property hasn't lost value. You can get market data from a realtor free just by asking for it, but it may cost a few hundred dollars to pay for an appraisal. But if your HELOC represents a significant component in your financial stability, it may be worth the expense. Lenders who are convinced may reinstate your HELOC in order to keep your business.
Bad credit mystery
Another common reason why HELOCs are frozen is reduced credit ratings. Some banks are interpreting credit scores differently now that they're in deep financial trouble, and what passed as a good score last year may now be viewed as not so good. Another possibility is that you may be having trouble maintaining a stellar credit score due to the rising cost of living or other circumstances. If your lender freezes a HELOC due to credit problems, obtain your credit report and review it for errors and omissions that might be corrected in your favor. Then, give the reporting agency time to fix the problems and take the new report to the lender to ask for a review of your HELOC.
If all else fails, it's still possible to get a HELOC elsewhere. Shop around until you find a bank willing to work with you. Each time a lender requests your credit history, it negatively impacts your score, so don't apply to many different lenders. Limit your applications to just those who are offering the best deals.