Was your HELOC denied? If you want to access your home’s equity, read on for a comprehensive guide on how to turn your denied HELOC into an approval.
If you want quick access to cash to make home improvements or pay off high-interest debt, a Home Equity Line of Credit (HELOC) can seem like a great option. Existing somewhere between a traditional loan and a traditional credit card, a HELOC allows you to use money now and pay it back in the future. This makes using a HELOC on a vacation home or HELOC for business purposes a viable option.
But what do you do if your HELOC application is denied?
This guide will go over some of the steps you can take to turn your denied HELOC into an approval. It will also go over other home equity loan alternative solutions to consider if you have an application for a HELOC declined or even a denied home equity loan.
Can You be Denied a HELOC?
First things first—if you haven’t yet started the application process, you might have some basic questions about HELOCs.
HELOCs are unique loans secured against the equity in your home, making them more accessible than other forms of borrowing. Here’s how they work:
- Secured loans – Your HELOC is secured by the equity in your home whereas a credit card, for example, is unsecured. While banks rely on factors like your income and credit score to predict your ability to repay credit cards, HELOCs are low-risk investments for lenders. If you are unable to pay, they can potentially foreclose on your home to recoup the cash. This makes secured loans like HELOC high risk for you, since job loss or reduced income could make it difficult to keep up with payments.
- Lower APR – An advantage of a HELOC over traditional credit is the lower annual percentage rate (APR). This is the amount of interest you will need to pay back on what you borrow. Because your HELOC is secured, the average APR is somewhere between 2 – 7% whereas the average for a credit card is closer to 16%.
In both a HELOC and a traditional credit line, the APR is variable and can change based on market factors.
- Length – A HELOC will generally have a draw period where you can borrow from your available credit and repay only the interest (though you can pay back the principal during this period if you choose). Once this period ends, you can no longer take money out and now you are in a repayment period.
This is different from a normal credit card where you can continually borrow against your available credit so long as you keep making minimum payments.
While you might assume that your equity gives you easy access to this potentially high-risk loan type, you can be denied a HELOC.
How? Your bank will make an assessment much like they would for any form of credit or loan. If you don’t meet their requirements, they can deny your HELOC.
Why Did I Get Denied for a HELOC?
Now that we understand what a HELOC is and how it differs from other financial options, let’s look at some of the reasons your HELOC application may have been rejected.
National trends can affect banks’ willingness to take risks.
The coronavirus pandemic has made it more difficult than ever before to get a HELOC or a home equity loan. In fact, many banks stopped issuing them altogether when the pandemic started.
Thankfully, there has been economic recovery and a boom in the housing market. This means banks are opening back up to HELOCs, but some are moving more cautiously—in part because of lessons learned during the 2008 housing crisis and in part because of the uncertainty still caused by the virus.
This means you may still find it difficult to secure a HELOC. You can’t control a global pandemic or the global economy. However, there are other factors in your personal finances that can lead to a denied HELOC.
Was your HELOC denied for debt-to-income? What does that mean?
Put simply, your debt-to-income ratio, or DTI, is a measure of how much you owe (credit card bills, outstanding loans, etc.) divided by your gross income. If you take all your monthly debts and divide them by your monthly gross income, that will give you your DTI figure. The lower the ratio, the better—and if your DTI is above 43%, many banks will decline your HELOC.
If you find yourself in this scenario, you can also look to personal loans for a high debt-to-income ratio.
Not Enough Equity
Your HELOC is secured by the equity you have in your home, and if you don’t have enough equity, you can be denied. You will probably need at least 20% equity in your home before you will be approved for a loan of any amount.
To figure out your equity, you can use a simple equation. First, find your home’s current value. This is what your home is worth today, not what you paid for it (real estate agents or appraisers can get this figure for you). Then, subtract what you still owe. That’s the amount of equity you have.
Low Credit Score
Just like when you’re looking for approval for any other type of loan or credit line, the bank will look at your credit score. The higher your score, the more likely you will be approved and the better rates you’re likely to receive.
Therefore, getting a HELOC with bad credit is not very likely. You’ll probably need a score of at least 620 to get a HELOC.
What to Do if Your HELOC Was Denied
Now that you know why your HELOC may have been denied, how do you fix it? There are some quick fixes if you need the money now and some long-term fixes if your timeline is flexible.
Sometimes, you need money now and you can’t change the underlying reasons that your HELOC was denied. Here are some possible solutions:
- Try a different bank – Different banks assess risk differently. If you feel like you should have qualified, maybe another bank will agree with you. It’s worth shopping around to find out.
- Ask for less – Banks may be willing to approve a lower credit limit or a credit limit with a higher starting APR if they see you as high credit risk. If you need money, this may be an option, but be careful—the higher interest rate could lead you to owe more in the long run.
- Provide collateral – The collateral for a HELOC is your home equity, but if that’s not enough, your bank may be willing to accept other items. If you do end up unable to pay, this means you could lose more than just your house.
Want to try a different form of home equity lending altogether?
- Credit Cards: We’ve already discussed the difference between HELOCs and credit cards. If you have excellent DTI and a high credit score but low home equity, a credit card could be an option. Just remember that credit cards usually carry an even higher interest rate.
- Home Equity Loans: You could also apply for a home equity loan. Since HELOC is a line of credit, the interest can fluctuate based on market conditions. So, what’s the difference between a home equity loan vs. HELOC? A home equity loan has a fixed interest rate that will not change. Generally, the rate will be slightly higher, but you may be able to take out a small lump-sum loan.
- Sale-Leaseback: One of the most convenient options for converting your equity to cash is through a sale-leaseback program. This offers you a financial solution where you sell your home, getting the cash you need, while still staying in your home as a renter—whether that’s a month or a lifetime.
Quick fixes could get you money now, but they all come with risk.
If you have some time, it may be better to try these long-term solutions.
- Wait it out – Need home remodel financing options? Continue making payments on your mortgage loan to build up equity over time (hopefully, market conditions will work in your favor, too). Avoid falling behind on mortgage payments as well. Eventually, you can develop enough equity to take out a HELOC.
- Improve your DTI – This can mean either paying down your debt or increasing your income. Easier said than done, but you can try budgeting or picking up a second job if those are possibilities.
- Improve your credit score – For many people, this may be even more daunting than improving your DTI. However, bad credit scores can be improved. Check your credit report for any inaccuracies and call the credit bureaus if you find any. Try to lower the amount of credit you currently use. Be sure to make an on-time monthly payment.
It will take some time, but if you improve your credit score you’re more likely to be approved for a HELOC.
- Sell your home – Selling your home is the tried-and-true way to access your equity. Keep in mind that sellers have to pay certain fees when closing the transaction, from realtor’s costs to state taxes. Of course, selling is not a guaranteed route to fast cash, especially if your home needs major repairs. But the right cash buyer or sales-leaseback program could get you the money you need without a long wait or high fees.
If you want quick access to cash to make home improvements or pay off high-interest debt, a Home Equity Line of Credit (HELOC) can seem like a great option. However, HELOC can be denied to you. If you are still unsure of alternative options to securing this equity after reading this article, consult a financial advisor to discuss your options.
- Investopedia. Home Equity Loan vs. HELOC: What’s the Difference? https://www.investopedia.com/mortgage/heloc/home-equity-vs-heloc/
- Bankrate. Home Equity Line of Credit (HELOC) Rates in October 2021. https://www.bankrate.com/home-equity/heloc-rates/
- Creditcards.com. Average credit card interest rates: Week of October 13, 2021. https://www.creditcards.com/credit-card-news/rate-report/
- Wall Street Journal. Why Home Equity Loans Are Still So Hard to Come By. https://www.wsj.com/articles/why-home-equity-loans-are-still-so-hard-to-come-by-11619699464
- Consumer Affairs. Home equity loan requirements. https://www.consumeraffairs.com/finance/home-equity-loans/requirements.html
- Forbes. Was Your Loan Denied? Here’s What To Do. https://www.forbes.com/advisor/loans/loan-denied/