A Home Equity Line of Credit (HELOC) is a popular way for homeowners to utilize their home’s equity to cover major expenses. But while HELOCs offer flexibility and relatively low interest rates, not everyone who applies gets approved.
If your HELOC application was denied, or you’re planning to apply soon, it is important to understand the reasons lenders might say no. Knowing what they look for can help you improve your chances of approval and avoid unnecessary roadblocks.
- Insufficient Home Equity
A HELOC is based on the value of your home, specifically how much equity you’ve built. If you haven’t paid down much of your mortgage or your property value has dropped, your equity might not be enough to qualify.
Most lenders only allow you to borrow up to 85% of your home’s appraised value, minus what you still owe on your mortgage. If your current balance is too close to that threshold, you might be denied or offered a much smaller credit line than expected.
- Low Credit Score
Your credit score is one of the first things lenders evaluate. Most institutions require a minimum score of 620 for a HELOC, but a score of 700 or higher is usually preferred to access better rates and higher credit limits.
If your credit history shows late payments, high credit utilization, or accounts in collections, lenders may see you as a risk and deny your application. Even if you have substantial home equity, a poor credit score can hold you back.
- High Debt-to-Income Ratio (DTI)
Your debt-to-income ratio compares your total monthly debt payments to your monthly gross income. A high DTI suggests you’re already financially stretched and may struggle to repay additional debt.
Most lenders prefer a DTI below 43%, though some may accept up to 50% depending on your credit and financial situation. If your ratio is too high, your HELOC application could be rejected, even if your credit score and home equity are solid.
- Unstable Employment or Income
Lenders want to see that you have reliable income to repay the credit you’re borrowing. If you recently changed jobs, work part-time or freelance, or have inconsistent income, lenders might view your application as risky.
In some cases, you may need to provide additional documentation like tax returns, bank statements, or letters from clients to prove your income is steady and sufficient to cover a HELOC.
If you’re struggling with employment or don’t have a stable income, it is advised to talk to the financial advisors at Amerisave to help you determine your eligibility.
- Poor Property Condition or Appraisal Issues
The condition and appraised value of your home matter significantly. If the property is in poor shape or the appraised value comes in lower than expected, it can reduce the amount of credit available, or result in a denial altogether.
Lenders may also deny your application if your home is a non-primary residence, such as a vacation home or investment property, which are often considered higher risk.
- Incomplete or Inaccurate Application
Even something as simple as missing documents or providing incorrect information can delay or derail your application. Lenders need accurate income details, property information, and proof of assets to properly evaluate your creditworthiness.
Before submitting your application, double-check all entries and make sure to include all required documentation. Being organized can speed up the process and increase your chances of approval.
