Factors that may disqualify you from a HELOC

A home equity line of credit could help you reach major financial goals. If you’ve done the work to establish a good or excellent credit score, that’s fantastic. Your score is a big factor in your application for any loan. Good credit could open the door to lenders’ lowest interest rates. 

Even so, a good credit score is just one piece of your application, and it isn’t enough on its own to get you all the way to loan approval. If you applied for a HELOC with a good credit score but were turned down, there are other pieces to examine before you reapply.

A denial from one lender isn’t necessarily the final word. Lenders have different requirements, and a strong application that fell short in one place could succeed in another. Other financing options might also work.

Let’s explore some of the most common reasons why an applicant with good credit may be denied a HELOC. 

Why lenders deny HELOC applications

If you understand why a HELOC application was denied, you might be able to work on that issue first. There are several reasons why an applicant could be denied a HELOC

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

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 debt secured by your home 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 could raise concerns. Lenders generally want to verify at least one to two years of steady earnings.

Appraisal value. In some cases, the lender's appraisal of your home might come in lower than expected. This reduces the equity available and changes your CLTV calculation. Getting your home re-appraised immediately is not likely to result in a big difference in value.  

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. If you want the best terms a lender has to offer, you may 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 might expect. 

Steps to take if your HELOC application was denied

Don't give up hope if your HELOC application is denied. You could take action to strengthen your application before reapplying, explore other lenders, or consider other financing solutions. Start with these steps:

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 principal 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 rebuilding credit habits alone, which could take months to spur a change.

Step 3: Strengthen your financial profile before reapplying

Once you know why your application was denied, you can work on the factors you’re able to change.

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 help build equity faster. Rising property values could 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. A recent job change could make income harder to verify. If you’re self-employed, keep detailed financial records or try to secure long-term contracts.

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, which vary.

At Achieve Loans, you can apply for a HELOC with a fair credit score. 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 14 to 45 days to shop around with multiple HELOC lenders without further affecting your credit score. VantageScore allows 14 days, and newer FICO Scores allow 45. During that time, all credit inquiries from HELOC lenders generally count as one. A two-week window keeps you within the limits of both scoring systems. 

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 the right fit right now

If you need access to funds, other options could 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 could 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 typical 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 may not  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.