What To Do If You’re Denied A HELOC Or Home Equity Loan

If you’re among the millions of U.S. homeowners who have a share of today’s record-breaking $11.5 trillion in available home equity, congratulations! To unlock that wealth — which nine in 10 mortgage holders have some — you might be tempted to take out a home equity loan or home equity line of credit (HELOC). These tools are a way to borrow against your assets, and can provide funds to eliminate high-interest debt, pay for home improvements, or address other big expenses.

But before you start counting the coins in your home piggy bank, let’s face it: getting approved for a HELOC or home equity loan isn’t easy. Nearly half of applications are rejected, which is far higher than the rejection rate for a typical mortgage.

Here are six things you can do if your application is rejected, as well as ways to improve your chances of approval.

Understand why you were rejected

First, find out why your application was rejected.

“Lenders can be very specific about why, but you may need to ask,” says Tom Hutchins, executive vice president of Angel Oak Mortgage Solutions, a non-qualified mortgage lender based in Atlanta, Ga. “If you figure out why and it seems like there’s a way to get over that hurdle, go for it.”

Obtaining a second mortgage is often more difficult than obtaining a first mortgage. Although HELOC denial rates are at their lowest in the past four years, about half of applications are still denied. Successful applicants tend to have high credit scores, low debt loads, and relatively small outstanding mortgage balances (less than half the home’s value).

Why is it hard to borrow against the equity of your home? There are good reasons why lenders are tough. First, lenders can’t sell a home equity loan on the secondary market as easily as they can buy a (primary) mortgage; they have to keep it on their books. Second, if the borrower defaults, the lender is second in line for recovery after the primary mortgage lender. This means that lenders are taking on more risk by lending money to borrowers.

What to do if your HELOC or home equity loan application is denied

Now that you know what lenders are looking for, it’s time to get your finances in order.

Increase your home’s property value

Lenders calculate how much you can borrow by calculating your loan-to-value ratio (CLTV). This ratio compares the total amount of the loan secured by your property with its appraised value, which is the amount of your mortgage. and The amount of the loan or line of credit you are applying for. Generally, lenders prefer a CLTV of 80 percent or less to minimize risk, meaning they will only lend up to 80 percent of the home’s value.

That could be a problem if you already have a large mortgage. “Once you get your home appraised, you may find that you don’t have enough equity to get a HELOC and still maintain an 80 percent CLTV,” Hutchens explains. Some homeowners who made a small down payment, made few mortgage payments or saw little appreciation in their property could run into trouble, he notes.

“If your home doesn’t have enough equity, it’s hard to fix that,” Hutchens acknowledges. If there’s a problem with the appraisal, you can either get a second appraisal from a different appraiser or have the first appraiser do a reappraisal. In the latter case, however, you’ll need to identify actual errors in the report, such as a miscalculation of the home’s square footage or amenities, or an inappropriate comparative (a similar home that recently sold).

Otherwise, if you’re short on equity, you should put your plans on hold and work on increasing your equity. This can be done by paying off your mortgage faster with extra payments or by making renovations to your home to increase its value (if you can afford it).

Adjusting requests

If your equity is insufficient for the amount of funding you need, approach the problem from the opposite angle: adjust the size of your loan application. Consider applying for a smaller loan or line of credit that fits within the CLTV limits set by the lender. You might also be willing to accept a higher annual percentage rate (APR). Being flexible on these terms can reduce the risk the lender perceives and make your application more likely to be approved.

Increase your credit score

You’ll have a better chance of getting approved for a HELOC or HELoan if you have a credit score above 700. In fact, the average score for people who got a HELOC in the first quarter of 2024 was 770, according to Home Mortgage Disclosure Act data.

“It’s surprising how many people aren’t as aware of their credit scores as they probably should be,” says Ralph Herrera, a real estate agent and senior real estate advisor at Engel & Völkers Atlanta, a Georgia-based real estate services provider. “People don’t pay attention to it until it’s too late. A little bit of planning ahead of time can help you be prepared.”

If your credit score is the reason for your denial, first check your credit report for any errors that may affect your score. Dispute any inaccuracies with the credit bureaus. Additionally, you can improve your chances of being approved by paying down your debts, making payments on time, and avoid opening new credit accounts.

Lower your debt-to-income ratio

When you apply for a mortgage, lenders will check your debt-to-income ratio (DTI) to see if you can comfortably handle the additional debt. DTI is the percentage of your monthly income that goes towards regular monthly debt payments.

A high DTI can be a big hurdle in getting approved for a HELOC or HELoan. Most home equity lenders require a DTI ratio no higher than 43%, and the median DTI for HELOC borrowers was 41% in the first quarter of 2024, according to HMDA data. “Borrowers face DTI challenges if they purchased their home within the last two or three years and interest rates are higher than they were prior to that time because of higher property values,” Hutchens says. (In fact, the median DTI for HELOC borrowers was just 32% in the first quarter of 2021.)

To improve your chances of being approved, work to reduce your existing debt by paying off any high-interest loans or credit cards. Taking on extra work to increase your income or negotiating a salary increase are also ways to lower your DTI.

Reapply with a different lender

If one lender turns down your application for a HELOC or HELoan, don’t worry. Try applying with a different lender, as each lender has different standards and risk tolerance. You can also look for a lender that allows a higher CLTV (for example, 85 percent or 90 percent).

“There are a lot of different loan programs and HELOCs out there,” Hutchens says, “and HELOCs are actually very popular right now. There’s liquidity in the market and a lot of investors are interested in holding HELOCs.”

If you’re considering applying again to the same financial institution, remember to wait a while before submitting a new request. The waiting period varies by financial institution, but you should wait at least one month, and sometimes up to six months, depending on the reason for the denial. The longer, the better, especially if you’ve used that time to improve your financial profile, credit score, or employment history.

Consider alternative financing options

Improving your financial situation takes time, so if you’re in a hurry, you might want to consider options other than home equity-backed products. Common options include:

• Personal loans are unsecured, so you don’t need to use your home as collateral. They often have higher interest rates and shorter repayment terms, but they can be quicker and easier to get than a home equity loan.

• Credit cards are an option for small expenses, but their high interest rates make them a poor choice for larger expenses unless you can pay off the balance quickly.

• A shared-equity arrangement that is more like an investment than a loan. You receive a lump sum of cash immediately and agree to share in a portion of the home’s sale profits or appraised value at a later date.
• Loans from friends and family can often be more flexible and cost-effective, but be sure to set clear repayment terms from the start to avoid misunderstandings and potential strain on your relationships.

Conclusion of mortgage denial

If your mortgage application has been rejected, don’t worry. It’s not the end of the world. First, take a closer look at your application and find out why it was rejected. Once you know the reason, you can improve those areas and apply again.

Also, consider other options that don’t put your home at risk. Personal loans or credit cards may be viable alternatives. Each has its pros and cons, so take the time to weigh them and find what works for you.