Why was my HELOC application denied even with good credit?

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

Can your HELOC be denied even with good credit?

Yes, your HELOC application can be denied even if you have good credit. There are several reasons why an applicant with a good credit score could be denied a home equity line of credit. Examples include:

• Insufficient income

• Inconsistent income

• Not enough home equity 

• High debt-to-income ratio (DTI)

What other factors do HELOC lenders consider beyond credit score?

Your credit history and credit score are important, but they’re not the only factors lenders consider when you apply for a HELOC. Other things could impact your odds for approval: 

Adequate home equity. Your application may be denied if you don't have enough home equity. 

Lenders limit how much you can owe against your home. The limit includes your primary mortgage if you still have one and the new HELOC you want. The sum of those two balances, when compared to your home’s value, are called the combined loan-to-value ratio (CLTV). If the lender’s CLTV limit is 80%, then your combined mortgage and HELOC balance can’t total more than 80% of your home’s value. 

If you have 20% equity before adding the new HELOC, you won’t meet the lender’s requirement because you don’t have room to borrow more and still stay under the lender’s 80% limit.

Debt-to-income (DTI). When you apply for a HELOC, your DTI will be calculated. Your DTI measures your monthly housing and minimum debt payments against your pretax income. Your DTI, including the new payment on the loan you want, needs to be under the lender’s limit to qualify for the loan.

Income. Lenders will verify your income during the application process. Showing a steady, consistent income when you apply for a HELOC is the best strategy. Lenders will have more confidence that you can afford to repay your loan.

Common reasons HELOC applications get denied

Some of the most common reasons for denial are: 

Insufficient home equity. Another common reason for a HELOC application denial is inadequate equity in your home. Exact requirements vary by lender, but most lenders require applicants to have at least 15% equity in their homes for a HELOC approval. 

Inconsistent or insufficient income. Another reason for a HELOC denial even with good credit is inconsistent or inadequate income. Lenders want to feel confident you can repay your debt when taking out a new loan. 

High DTI. If you have a high DTI, a significant portion of your income goes to repaying outstanding debt. Your lender may deny your home equity loan application because, on paper at least, it looks like you don’t have enough room in your budget to add a new payment.

Low credit score. If you were denied even though you have a credit profile that the lender considers “good,” a low credit score wasn’t the reason your application didn’t make it through. But it’s a hurdle for some borrowers. Most lenders outline minimum credit scores in their home equity loan requirements. Generally, you’ll need a credit score of at least 620 to 640 to qualify for a home equity loan, but some lenders require higher scores. It’s also possible that your credit isn’t as good as you thought it was.

Related: 10 home equity loan facts to know before you apply

What can you do if your HELOC application is denied?

Don't give up hope if your HELOC loan application is denied. Are you wondering, “Why was I denied a HELOC?” The lender will send you an Adverse Action letter that tells you which credit bureau provided your credit report and the reason (or reasons) your application was denied. This information could help you decide what to do next. Here are some options to consider after a HELOC application denial: 

You can take steps to increase your approval odds before reapplying, explore alternate lenders, or consider other financing solutions. Here are some actions you could take:

Lower your DTI

You can lower your DTI by reducing your debt or increasing your income (or both). A lower DTI could help you qualify. Lenders will have greater confidence in your ability to repay your HELOC loan.  

Build more equity 

If you were denied due to inadequate home equity, building more equity could help increase your odds of approval. 

Making regular or even extra payments on your home loan will lower the outstanding loan balance over time and help you build more equity. If it’s affordable, pay extra toward the mortgage principal. The less you owe on the home, the more equity you have.

You also build equity if your property value goes up (but your debt doesn’t). 

Explore other lenders

You may want to consider applying with another lender. Just because one lender denied your HELOC application doesn't mean others will make the same decision. Research other lenders to know what to expect. You may find a HELOC lender with less strict approval requirements.

Consider other financing solutions

If you hoped to get a home equity loan for debt consolidation and feel discouraged, it may be time to explore other financing solutions. You may qualify for a personal loan if you had a HELOC application denied even with good credit. Many people use personal loans to pay off debt. 

What’s next?

Don't assume you’re out of options if your HELOC application was denied. 

Here are some next steps to take:

• Talk to your loan officer. Ask your lender to explain the reason your loan application wasn’t approved. That’s the best way to know which factor to work on.

• Lower your DTI. You can use a DTI calculator to calculate your DTI. If you have a high DTI, prioritize paying down outstanding debt balances to lower your ratio before reapplying.

• Explore other debt solutions. If you’re planning to get a loan to pay down debt, you could consider a personal loan. If you have significant unsecured debt and you can’t afford to fully repay it, you might qualify for debt relief.