What to do if your HELOC application is denied: 5 steps you can take

A HELOC denial from one lender isn't necessarily the final word. Lenders have different requirements, and a strong application that didn't work in one place may succeed somewhere else. There are also solid alternatives that could put your home equity or creditworthiness to work.

Why lenders deny HELOC applications

If you understand why a home equity line of credit (HELOC) application was denied, you may be able to work on that issue first.

Your credit score matters, but it is just one piece of the picture. Lenders assess several factors together, and a strong score doesn't guarantee approval on its own. Common denial reasons include:

Low credit score. Most lenders prefer a minimum credit score somewhere between 620 and 680. You might be able to apply with a lower score if you’re using the HELOC to consolidate debt. On the other hand, if you want the best terms a lender has to offer, you’ll probably need a score above 700. Confirm that your score is where you believe it to be; errors on a credit report are more common than you may expect. 

Insufficient equity in your home. Most lenders use a combined loan-to-value (CLTV) ratio to limit how much they’ll lend you against your home. CLTV is your total home debt compared to your home's market value. If the lender's CLTV limit is 80%, the sum of your mortgage balance and the new HELOC amount cannot exceed 80% of your home's value.

High debt-to-income ratio (DTI). Your DTI is your monthly housing and debt payments divided by your gross monthly income. If a large share of your income already goes toward housing and debts, the lender might decide that you can’t afford to take on a new payment. 

Inconsistent income. Lenders want confidence that you will be able to repay what you borrow. Irregular income, a recent job change, or inadequate documentation may raise concerns. Most lenders generally want to verify at least one to two years of steady earnings.

Property issues. In some cases, the lender's appraisal of your home may come in lower than expected. This reduces the equity available and changes your CLTV calculation.

Step 1: Find out the reason for the denial

Federal law requires the lender to send you an adverse action notice—a written explanation of the reasons your application was not approved—within 30 days of a completed application. Read it carefully. If the explanation is vague, contact the lender directly and ask for specifics.

Your next move depends on the cause. Different causes require different responses and different timelines. When you know which factor applies to your situation, you're in a better position to take action.

Step 2: Review your credit report for errors

If credit was a factor in your denial, get your reports from all three bureaus—Equifax, Experian, and TransUnion—at AnnualCreditReport.com, the only site authorized by the federal government to provide your free credit reports. Review each one for errors, such as accounts that aren't yours, incorrect balances, or outdated negative items.

Dispute any credit score inaccuracies directly with the credit bureau. A successful dispute could improve your score more quickly than behavioral changes alone, which could take months to spur a change.

Step 3: Strengthen your financial profile before reapplying

Many of the factors that led to a denial are within your control.

Lower your DTI. Your DTI goes down when you reduce your debt or increase your income. Pay down existing balances to reduce your monthly obligations and improve the ratio. 

Build more equity. Regular mortgage payments build equity over time. Extra payments toward the principal typically accelerate that process. Rising property values also increase your equity.

Stabilize your income. Lenders generally want to verify at least one to two years of steady, documentable earnings in the same field. Try not to change jobs. If you’re self employed, keep detailed financial records.

Improve your credit score. Pay down credit card balances, make all payments on time, and avoid applying for new credit accounts. Even a modest improvement could move you into a more favorable position with lenders.

Step 4: Consider a different lender

A denial from one lender doesn't mean others will reach the same decision. Lenders set their own requirements, and those requirements vary.

At Achieve, you can apply for a HELOC with a low credit score if you’re using the money to consolidate debt and you let your lender pay your other creditors directly. If another lender turned you away for a low credit score, it’s worth a call to an Achieve Loans Mortgage Advisor.

If you receive a denial soon after you apply, consider shopping around to other lenders quickly. You get a 14-45 day window to shop around to multiple HELOC lenders without excess damage to your credit score. VantageScore allows 14 days, and newer FICO Scores allow 45. During that time, all credit inquiries from HELOC lenders will count as one. Since you don’t know which type of credit score a lender will look at, it’s a good idea to keep your applications inside a two-week timeframe. 

Step 5: Adjust your loan request

If your denial was related to your DTI or your CLTV ratio, you could request a smaller credit line to get the numbers within the lender's limits. 

Alternatives if a HELOC isn't available to you right now

If you need access to funds, other options may be valuable.

A personal loan is an unsecured loan, which means your home is not used as collateral. Approval is based primarily on your credit and income. Personal loans may be a workable option for smaller amounts when a HELOC isn't the right fit.

A cash-out refinance is a new mortgage for an amount larger than your existing mortgage. Your existing mortgage is paid off, and you get the difference in cash you can spend. A cash-out refinance could have a lower interest rate than a HELOC, which could bring the monthly payment down to a number that works.

If the goal is to reduce the burden of high-interest debt, several debt solutions could work. You could set yourself up on an aggressive DIY payoff plan or enroll in a debt management plan with the help of a credit counselor. If you can’t afford to fully repay your debts, a HELOC wouldn’t be a good option anyway. In that case, debt settlement might be a more realistic path forward. Have a chat with a debt expert to find out more about what options might work for you.