Those pesky Home Equity Lines of Credit (HELOCs).. What’s the deal?

The fact is, unreleased Home Equity Lines of Credit (HELOC) are a large source of claims in the title insurance industry. An equity line is essentially a revolving line of credit secured by a mortgage Deed of Trust against a piece of property. One of the most frequent surprises to borrowers, sellers, agents, and lenders alike is an unexpected equity line Deed of Trust showing up on title after the title search is complete. Sometimes the seller doesn’t realize a HELOC attaches to the property and is a lien that has to be paid off in order to sell the property. The other scenario that we’ve seen a hundred times: a homeowner takes out an equity line, pays it down to a zero balance (often never even using it) and goes about their business only to be shocked when that equity line that was supposedly “closed” is still recorded against a property.
You may be thinking, “How is this even possible!? The equity line was paid and closed so it should no longer affect my home, right?” Unfortunately, borrowers are often unaware that there is a difference between “paying a loan off” and “paying a loan down.” Since many home equity loans allow funds to be borrowed, repaid in whole or in part, and then borrowed again, the banks will not automatically close an equity line simply because it was paid down to a zero balance. In order for the banks to prepare the appropriate release document(s) (referred to as a Certification of Satisfaction here in Virginia), it needs to be requested in writing by the borrower to “close the account” and the circuit court recording fee of $41 will typically be collected by the bank. Please ensure the seller DOES NOT close this HELOC account prior to closing and allows the settlement company to order the payoff which will show a zero balance and will collect the $41 fee which will show on the HUD. If it is closed by the seller this will delay closing as the buyers closing agent will need a release recorded prior to settlement and lenders take anywhere from 60-120 days to have this release prepared; executed and recorded.
When insuring a transaction in which a HELOC Deed of Trust is recorded against a property whether it be a refinance or a sale, a title company will require that the line of credit be irrevocably terminated and released. Title companies have a large responsibility when it comes to equity lines, specifically in the event of a sale since an equity line that is not closed and/or released could potentially be borrowed against while secured against a piece of property that the borrower no longer owns. The best protection for a title company against an advance being made after the closing is receipt of a payoff statement prior to settlement showing a balance owed, or in many cases a zero balance, either of which usually includes collection of the $41 recording fee for the release (as this indicates the lien will be released after settlement).This payoff request causes the lender to freeze the account and at closing your seller will sign a document affirming their wish to permanently close this account.
In the event that an unexpected equity line comes up during the course of your next closing, it is important to obtain applicable account information and/or loan numbers and be in close communication with your title company. It is also best to consult your title company and allow them to contact the bank on behalf of you or your client to ensure the account is not closed ahead of settlement and instead addressed through settlement on the HUD. Most of the time, unreleased equity lines can be handled easily, but keep in mind that any Deed of Trust recorded against a property must be addressed prior to closing or settlement may be delayed.