What happens if house prices go down after HELOC appraisal?

Question

Hi all,

Let's say you get an appraisal and open a HELOC, and some time later house prices in your market come down. What happens if:

1) You've already taken a draw from the line of credit

2) You haven't drawn on it

I'm guessing in case of #1, the lender doesn't do anything (unless there's an option similar to a margin call for stocks)?

But for #2, does the lender re-appraise and lower the amount you can borrow?

Kyle J. · Answer

I couldn't say for sure because every lender is going to have their own rules when it comes to HELOCs.  So what one bank might do, another might do something totally different.

My guess is that any drop in value would have to be fairly significant for a lender to reduce your credit limit, but I have yet to see a lender actually put a number on it.  It's also possible that a lender could even freeze your account, which would mean you could no longer draw on it at all.

But again, it's going to vary lender to lender.  As an example, here's what one lender has to say on the matter: Understand your HELOC Freeze or Reduction.

I've heard of borrowers who had their credit limits reduced when the crash happened and housing values plummeted, but I haven't heard of it happening to anyone lately.  I personally have multiple HELOCs (each with six figure credit limits) and haven't had the limits reduced, but then again I've only had them for two years and the values of the homes securing the lines haven't dropped in that period of time.  They may fluctuate slightly up or down at any given time, but they've appreciated overall if anything.

In any event, whenever you do get around to shopping for your HELOCs, here's a list of questions to ask when calling around: What You Need to Know When Shopping for a HELOC.

Hope it helps and good luck.

Levi T. · Answer

They evaluate loans normally yearly, some have renewal fees if they have to spend time on it. Each bank has it's own rules, but if the LTV hits over 80% they could call it in, but I would not count on it as markets move over the season, so they likely need a larger move. If the property starts ticking up towards the hundo I'd say they would call. Multifamily has been hot as of late, I've been told we could see a lowering to 75% LTV to try and cool off the market here soon. Something to keep in mind.

Wayne Brooks · Answer

They can of course lower the limit at any time, quite common in 2008/2009ish.  I had one for $200k on my primary, which they lowered to like $87k, in 2010 or so.  Typically they won't call it just for the asset value being lower, unless there are changes to your personal finances.

Kyle J. · Answer

The lender does have the right to lower the limit in the event the value of the home securing the HELOC drops significantly. If there's any outstanding balance already drawn, you'd just pay that back according to the terms of the HELOC.

Harman N. · Answer

@Kyle J. - thanks for sending your article!

Harman N. · Answer

@David Dachtera - I don't have a lender yet. I'm currently working to rehab and add value to a duplex in SF, and then hoping to use that equity created to fund more REI. In a couple of months when I'm done rehabbing I'll open a HELOC. I'm just worried that late this year or early next year SF HPI could start trending downward

@Kyle J. - Do you know how often lenders typically exercise the right to lower the limit? And what magnitude of price drop usually compels them to do so?

David Dachtera · Answer

@Harman N.,

Those sound like good questions to ask your lender.

What happens if house prices go down after HELOC appraisal?

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