3 reasons HELOCs create title headaches

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.

agents, Buying 'n' Selling, Home Loan, lien, real estate, sellers, settlement, title insurance

Comments (4)

  • I closed/bought on a home through a title company back in 2015, at the time the title commitment showed no outstanding liens against the property or seller. It has come to my attention that there was a heloc lien on the seller’s home (the home I bought) at the time of closing, but the bank never recorded the Deed of trust, so the title company did not see it. Can the bank record the lien after the sale and cloud title? This is a heloc in Texas no personal recourse of the homestead owner (seller) available to the bank. What can I do to protect myself from this becoming a cloud in my title.

  • Hi Raul, Sorry to hear about your situation. This sounds like it could potentially be a case of seller fraud involving a home equity line of credit. You can read more about this type of fraud in another entry on our blog (https://federaltitle.com/blog/seller-fraud). The best way to protect yourself is to invest in an owner’s title insurance policy. To get to the bottom of things, you will want to reach out to the title company that handled your closing in 2015.

  • Marie Malarky

    I bought my house in 1996 through GMAC and paid it off in 2009. There was a Heloc loan attached to it that I never used and now as I go to sell my house I can”t close because the heloc loan although never used was never released. GMAC have given all there loans to many different companies so how do I find it and get it closed. I have been trying for almost a month and have the title company and their lawyers looking. What do I need to do to close on my house? are there any alternative solutions?

  • Hi there,
    You should speak to your title company to see if they have any suggestions for this jurisdiction.
    Nikki Lyon

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