Wondering why your home equity loan was not approved? Are you troubled by credit card debt or battling with a higher interest rate on your existing loans? There are many reasons for a denied home equity loan application. Read on to learn why.
It’s never easy to hear the word “no.” Even as children, we feel a sense of rejection and inherent unfairness when we’re denied something we feel we deserve. And that’s just when your parents wouldn’t buy you ice cream.
The stakes are a lot higher when you’re an adult, and the thing you’ve been denied is money that you’re counting on. Whether you need the loan to build credit or manage your finances, it is essential to understand why the lender may deny your application.
In this guide, we’ll look at some of the reasons you may be turned down for a home equity loan, as well as some potential home equity loan alternative solutions. That way, despite your denied home equity loan, you can feel confident and equipped with a plan to secure the money you need.
Can You Get Turned Down for a Home Equity Loan?
Why would I be denied a home equity loan?
It’s a fair question. After all, one of the reasons we’ve been told homeownership is so important is to build equity. It becomes an asset we own, so why shouldn’t we be able to borrow against that asset if we want?
The fact is a bank can turn you down for a home equity loan or even a HELOC. In fact, due to factors that were worsened by the Coronavirus pandemic, they’re more likely to deny your loan now than ever before.
- In 2020, many banks lessened or suspended issuances of home equity loans or home equity line of credit (HELOC) in response to the pandemic. This was in part due to economic uncertainty caused by the pandemic. The situation further increased the interest and demand for a second mortgage, but not all borrowers had a satisfying credit report to get the approval.
- Another factor in this trend is the 2008 housing crisis that led to the Great Recession. Learning from that period, many home equity lenders decided that in a time of great financial instability, home equity loans were too risky.
- Despite the economic recovery and a recovery in the housing market after the onset of the COVID-19 pandemic, many banks have been slow to issue home equity loans in a pre-pandemic fashion.
So, when you were turned down for a home equity loan, there may have been factors at play that you had no control over. However, there are also factors a homeowner can control. They could even explore options like a home equity loan to buy another house or a home equity loan with bad credit.
Reasons for Home Equity Loan Denial
Your personal financial history can affect your home equity loan application. Potential reasons for denial that fall within your control (to varying degrees) include:
- Poor credit score
- Insufficient home equity
- Unstable employment or income history
- Poor debt-to-income ratio
Let’s look a little more in-depth at each of these reasons so you can better identify what may have caused your denial.
Poor Credit Score
Just as with any other loan, a bank will look at a borrower’s credit score to determine your loan worthiness. Generally speaking, a score of at least 620 will improve your chances of approval.
Many factors go into determining your credit score, but five of the most important are:
- On-time payment history – Avoiding late payments on loans and credit cards is key to maintaining a good credit score.
- Amounts owed – The percentage of credit you owe compared to your available credit will also affect your score.
- Credit history – Sometimes, you haven’t done anything wrong—you just haven’t built up enough credit history to show your creditworthiness.
- Credit mix – There are many types of credit. Having a good mix of different credit is good. Whether it’s a credit card loan, car loan, mortgage loan, or student loan, they all can help your overall credit score.
- New credit – Too many recent additions to your credit, whether through new loans or new credit cards, can harm your score.
Insufficient Home Equity
To determine your home’s equity, you need to know two things:
- Your current home value – This has nothing to do with how much you paid for your home. This is how much your home is worth right now. A real estate agent or professional appraiser can give you an estimate of your home’s current value.
- The balance you owe – This is the amount you still owe on your mortgage loan. If there are any additional liens on your home (say, from a prior HELOC loan), those are part of the balance owed.
Taking your home’s current value and subtracting the balance you owe will give you your equity figure. You will likely need to own at least 15-20% of your home to qualify for a loan. At that point, your bank may lend you up to 80% of your home equity.
For example, if you owe $150,000 on a home worth $250,000, you have $100,000 in equity and may be eligible for a loan of up to $80,000 (depending on other factors in your financial history).
Unstable Employment or Income History
Before a bank will lend you money, they want to know you’ll be able to pay it back. If you’re unemployed or have an unstable employment history, the bank may decide you’re too much of a risk to lend to.
Poor Debt-to-Income Ratio
Your debt-to-income ratio (or DTI) is another factor used to show how likely you are to pay back your loan. To determine your DTI, take all your monthly financial obligations such as current loan payments, credit payments, etc. Now divide this by your monthly gross income.
The higher your DTI, the less likely a bank will approve you for a loan. Ideally, you’ll want a DTI under 43%.
What to Do if Your Home Equity Loan Was Denied
Now that you know some of the reasons you may have been turned down for a home equity loan, what can you do about it?
Let’s look at some short-term and long-term solutions that may help you change your denial into an approval.
If you need cash quickly, there are short-term solutions that may help you get your loan. It is important to consider the risks before taking any of these actions.
- Shop around – A denial from one bank doesn’t mean denial from all banks. Different home equity lenders or mortgage lenders have different definitions of acceptable risk, so while you may not be approved by one, another may give you your loan. This is a relatively low-risk option, and because of differences in how banks are responding to the economic recovery, it may work. But as requirements tend to be similar from bank to bank, it’s a bit of a long shot.
- Put up collateral – In a home equity loan, your home’s equity is your main collateral. But you can see if your bank will accept further collateral like your car’s title. Just be careful since the bank can seize your collateral if you fail to pay.
- Ask for less – Your bank may be willing to issue a home equity loan in a smaller loan amount than you originally asked for. This may not be ideal, but sometimes something is better than nothing.
What were you planning to use your loan for? Can it wait?
If your goal was to use the money for something like a home renovation that you can put off for a while, these long-term solutions might help you get approved for your home equity loan in the future.
An added benefit of these is that even if they don’t result in you being approved for your loan, they will benefit your overall financial health.
- Fix your credit score – The world of credit scores can be befuddling. Trying to fix a poor score sometimes feels like completing a jigsaw puzzle while wearing a blindfold. But you don’t need to be overwhelmed. There are basic steps you can take to build credit, improve your score, fix your credit report. Fixing your credit score takes time, but don’t get frustrated—the effort will be worth it.
- Increase your income – Easier said than done, right? If increasing your income was as simple as asking for more money, we’d all be doing it. Instead, it likely means a second job or some form of side hustle.
Increasing income may mean trade-offs in terms of time with friends and loved ones, and not everyone will have the energy to take on more work. But, if it’s something you can do, it will help your financial situation. However, you can also always turn to personal loans with no proof of income needed.
An Easier Way to Convert your Home Equity to Cash
There’s another solution: a sale-leaseback program. A sale-leaseback, also known as a rent-back agreement, is not a loan, so the program does not have the same requirements for credit and income as traditional banks. Instead, it’s a solution-based way to convert your home equity into cash.
When you use a sale-leaseback solution, you may find the best way to convert your equity into cash while meeting other financial goals. So how does a sale-leaseback work? You sell your home, convert your home’s equity to cash, and lease back your home for as long as you like.
This gives you the financial flexibility you need now while setting up a personalized plan that works on your timeline and with your goals. So stop fighting with banks and consider looking into a sale-leaseback program to find a solution that works for you.
The concept of a secured loan, like a home equity loan, can be complex to navigate, especially when considering the loan term and the loan amount. To make an informed decision, it’s crucial to understand the home equity loan pros and cons. But even when you are fully aware, you may find your application for a home equity loan turned down by a traditional lender.You might also consider options for debt consolidation, which can help manage and reduce credit card debt by offering a lower interest rate. With consolidation, instead of multiple monthly payments, you’ll only have to worry about one payment. The key to getting the most from consolidation is to secure a personal loan or another form of credit with a lower interest rate than the combined rates of your current debts.
If you are still unsure of alternative options to securing this specific loan after reading this article, consult a financial advisor to discuss your options.
- 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
- Discover. What is needed for a home equity loan? https://www.discover.com/home-loans/articles/home-equity-loan-requirements/
- Bankrate. How to get a home equity loan with bad credit. https://www.bankrate.com/home-equity/home-equity-loan-bad-credit/
- Experian. What Affects Your Credit Scores? https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/
- Consumer Affairs. Home equity loan requirements. https://www.consumeraffairs.com/finance/home-equity-loans/requirements.html