Dear Liz: I’m in a potentially bad situation with my home equity line of credit. I’m trying to refinance my primary mortgage and would save nearly $150 a month. But the HELOC lender is dragging its feet on agreeing to a subordination. If the lender doesn’t agree, I lose the deal. I’m wondering why the lender does not believe it to be in its interest to help when I am trying to improve my financial situation. Can you give me some insight into the line of thinking here?
Answer: Unfortunately, many would-be refinancers are in your uncomfortable position. They have a second mortgage, such as a home equity line of credit, on their property. These loans are known as “seconds” because the lender is in second position to be paid off when the home is sold, after the primary lender has been paid.
For a refinance to proceed, these HELOC lenders have to agree once again to be subordinated into second position. Some lenders balk because they don’t believe their borrowers have sufficient equity to cover both loans.
But a bigger problem seems to be lack of staff and lack of priority. Lenders are so busy trying to meet the demand for refinancing that other concerns, including subordination, often fall to the bottom of their to-do list.
That means you have to be extremely vigilant if you don’t want your refinance deal to fall apart. Call your new lender and your HELOC lender every few days to track the progress of your subordination. If there are problems or missing paperwork, promptly address those issues.
Dear Liz: I’m curious about your recent answer to the folks asking about a short sale. In it, you said, “Short sales ... typically harm credit scores as much as foreclosures do.” As a real estate professional, I am under a different impression.
Certainly, in financial distress, one’s credit score takes a beating, but I don’t believe there is a code or classification for short sales on credit reports. We generally encourage short sales when possible, as we feel short sales allow debtors to get back on their feet quicker. I’d appreciate other data if you have it, as this would change how I educate clients. I do think we may see some changes in the future. As the number of short sales increases, we may see some way to note such transactions on credit reports.
Answer: The information about how credit scores are affected by short sales comes directly from FICO, the company formerly known as Fair Isaac Corp., which created the leading credit scoring formula.
You’re right that the formula has no specific code for a short sale, which is when the lender agrees to accept the proceeds of a home sale as full payment of a mortgage, forgiving whatever additional balance is owed. But most lenders report short sales as a debt settlement, which has a strongly negative effect on credit scores.
Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604,or via the “Contact Liz” form at www.asklizweston.com.