What Happens If I Miss Payments on My Home Equity Line of Credit?

A home equity line of credit (HELOC) is a mortgage product attached to a residential property. Missed payments are reported to credit bureaus and negatively impact the borrower's FICO score. When payments are not made, the borrower violates the terms of the HELOC agreement and the issuing bank can freeze the available credit and may close the line.

History of Credit Reporting

The credit bureau Equifax began operations in Georgia in 1913, although it evolved from a smaller company founded in 1899. In 1968, TransUnion began compiling credit records, and in 1996 Experian became the third major credit bureau to serve North America and Europe. Credit bureaus must comply with the 1970 Fair Credit Reporting Act which limits information sharing. In the 1990s, amendments to the Act required creditors to regularly report account activity. In the U.S., people are legally entitled to a free copy of their credit report once a year.

Function of Credit Scores

Credit bureaus record information that enables prospective creditors, employers and insurers to see the payment history of borrowers. Lenders use credit reports to price loans. Banks charge higher interest rates for people with poor payment records because they are viewed as high risk. The bureaus award individuals FICO scores based on payment history, debt levels and other related factors. Most banks require customers to have FICO scores above 680 to qualify for a HELOC.

Time Frame

Most banks allow HELOC borrowers a 10-day grace period that begins the day the monthly payment is due. No penalties are assessed for payments within the grace period. Banks can freeze HELOCs at any time and many freeze HELOCs when payments are consistently 10 or more days late. Payments delinquent by more than 30 days are reported to the credit bureaus and remain on file for up to seven years. Payments are also reported again when more than 60, 90 or 120 days late.

Misconceptions

Many homeowners think that banks cannot foreclose on HELOCs in second lien position but this is not the case. Laws vary by state, but second lien holders can foreclose on a home when the borrower has missed payments. Generally banks choose not to foreclose in this situation because the foreclosure is subject to the first lien being satisfied. In situations where a borrower owes more than the house is worth, the second lien holder may end up with nothing if the house sale only raises enough funds to satisfy the first lien holder.

Warning

HELOCs are variable rate loans that generally use the Prime Rate as a pricing index. Prime Rate is fixed at a margin of 3 percent over the Federal Funds Rate and it changes every time the Funds Rate is adjusted by the Federal Open Market Committee. Most banks cap HELOC rates at 20 percent, so people who use lines when rates are low often see monthly payments double or triple when interest rates rise.

References

• U.S. Department of the Treasury, Comptroller of the Currency: Answers About Credit Card Payments and Late Payments
• Consumer Privacy Guide: Fair Credit Reporting Act
• Financial Web: Where Did the Three Major Financial Credit Bureaus Come From?
• MarketWatch: Equifax, Inc.
• Federal Reserve Board: What is a Home Equity Line of Credit
• WSJ: U.S. Prime Rate, Frequently Asked Questions

Resources

• MSN Money: One Late Payment Can Doom You