4 Things to Take Care of Before Extending a HELOC
by Alok Bansal
The interest rates and property prices are at a record high, and this has been consistently translating into a significantly lower demand for fresh origination and re-finances. Data suggests that the share of refinance within mortgage activities fell to its lowest level since 2008, to 36.5 percent of total applications.
In this economic environment, HELOCs (Home Equity Line of Credit) are offering a ray of hope for mortgage companies to sustain and grow their lending business. That’s because the value of home equity is at an all time high. As per the numbers from the third quarter of 2018, the value of real estate owned by Americans stands at 25.6 trillion dollars, whereas the mortgages stand at 10.3 trillion dollars. This implies that there is a value of 15.2 trillion dollars locked into home equity, that lenders could leverage to expand their business prospects.
However, before extending any HELOC, it is pertinent to carry out the due diligence and take into account all the necessary considerations.
In addition to looking into factors such as credit score and history, employment history and monthly finances, there are a few more fundamental factors that needs to be considered before issuing a HELOC.
Here are 4 such key factors you must be careful about –
1. Actual Valuation
As a mortgage company, you must have accurate information about the present-day valuation of the real estate before you lend funds against the equity you assume the asset has built up.
Typically, as is the industry standard, you probably allow borrowers to avail a loan up to eighty five percent of the value of their home minus the sum they owe.
In that situation, if your valuation of the equity built up in the home is flawed; the collateral in the form of the home might not be sufficient to cover your credit risk. Hence, having a thorough and clear valuation is a must.
2. Ownership Title
The ownership title is another critical factor that you must consider before you extend a HELOC loan. In the property market, it is common for homeowners to sell out or transfer the title of their mortgaged properties.
In that situation, if there is no asset-ownership backing that lender, there is no legitimate collateral to secure your credit risk even if the mortgaged property is highly valued today.
Hence, as a HELOC lender, before you extend any additional credit on a later date against the first mortgage, it’s a must to verify that the applicant is the still the title owner of the mortgaged property in question.
Since liens are legal claims or right against the property for the creditors of an individual, it is another key piece of information that you must have full knowledge about before relying on the equity built up in a property.
If the asset against whose value you’re planning to extend a HELOC has liens, you can’t sell it off unless the liens are cleared up. In that case, even if the home equity valuation, or ownership title is in your favor, the collateral might not help you in any way to cover your credit risk in case of default. Being aware of the existing liens, and ensuring they’re cleared is the way forward to take care of this.
4. Judgment Search
Finally, a thorough judgment search is also very important to ensure that your interest is secure in the mortgaged property. If the homeowner is having a legal dispute with any party that could have financial consequences, the legal scenario may jeopardize your interest in terms of claiming ownership of the property in case of a default.
Having a firm grip over all this key information is vital to protect your business interest as a mortgage lender, before you extend HELOCs. What’s equally important is the ability to carry out these checks in bulk numbers and have access to the information with agility to maintain your edge in an extremely competitive market.
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