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Dec 28

Real Estate Insights: How HELOCs Can Cause Settlement Headaches

Settlements can be delayed or canceled if HELOCs aren’t handled correctly

While less common than they once were, HELOCs can cause settlement nightmares. Even HELOCs that have been repaid and show a zero balance can be a significant problem.

Cornerstone Insight

When a property mortgage is paid off, the loan can’t be redrawn. The mortgage is automatically closed, a release is recorded, and the property title is no longer encumbered by the mortgage. Assuming no other issues exist, the title is clear.

HELOCs are different. Even when the balance is zero, since the property owner can draw on the line of credit again, the account isn’t automatically closed. A HELOC remains open even if the property owner never uses it again.

A title search will show the HELOC as a lien on the property. If the HELOC remains after settlement, the now-former owner can still draw on the HELOC after closing, creating a headache for the new owner.

HELOCs don’t require title insurance, but they can cause a nightmare when the associated property does need title insurance.

The key is for the title company to confirm not only that the HELOC is paid off, but also that it has been frozen and cannot be drawn upon. Typically, the lender will provide a freeze letter before closing. If the seller obtained a HELOC from Bank A, paid it off, then obtained a second HELOC from Bank B, a release will be required for both HELOCs.

If you have any questions about HELOCs or other potential title issues, or if you would like to discuss an upcoming or prospective transaction, please contact us.