The Top 4 Reasons People Get Denied a HELOC

Home equity lines of credit (HELOC) are a way for mortgage borrowers to access the equity in their homes without selling them. When used responsibly, HELOCs can be a fantastic benefit of homeownership, allowing homeowners to invest in necessary home renovations to increase the value of their home. However, qualifying for a HELOC can be difficult for some borrowers. 

Reasons why people may be denied a HELOC:

1. Insufficient Income

One of the most common reasons for denial is a borrower’s lack of sufficient income. Even if a homeowner has significant equity in their home, lenders need to be confident that the borrower has the income to repay the loan. This is determined by the lenders’s rules of underwriting, which are established to prevent discriminatory practices. 

2. Too Much Debt

Lenders will rarely approve a loan for someone who is spending more than 43% of their income on debt, including mortgages, car payments, credit card payments, and student loan debt. If a borrower is already carrying a lot of debt, lenders may worry that they will struggle to make payments on the HELOC in addition to their other financial obligations.

3. Low Credit Score

Lenders are requiring higher credit scores for HELOCs, with the best rates going to those with top-tier scores. Borrowers with credit scores below 680 may have a more difficult time qualifying for a HELOC.

It’s important to note that lenders also consider a borrower’s credit history in addition to their score. Borrowers with a history of late payments or other negative credit events may have a harder time qualifying for a HELOC.

4. Insufficient Home Value

While home values have risen in recent years, there are still many homes that are “underwater,” meaning that the total of all mortgage balances exceeds 90% of the home’s value. If a homeowner has too little equity in their home, they may not be eligible for a HELOC.

In conclusion, homeowners who are considering applying for a HELOC should be aware of the factors that lenders consider when evaluating their application. By understanding the potential reasons for denial, homeowners can take steps to improve their chances of being approved for a HELOC. This may include reducing their debt-to-income ratio, improving their credit score, or waiting until their home has increased in value. With careful planning and consideration, a HELOC can be a powerful tool for homeowners looking to make improvements to their home or consolidate high-interest debt.