Do you have an expensive home repair or remodel to complete? Or maybe it’s time to send one of the kids off to college. Whatever the reason for needing an influx of money, a home equity loan may be a good option for you to consider.
What is a home equity loan?
A home equity loan is a second mortgage you take out against your home’s value. It is paid off in monthly payments just like your mortgage. Because your house is used as collateral you can typically obtain lower interest rates than with other loans since the lender is able to foreclose on your house if you default.
Can you be denied a home equity loan?
Just like a regular mortgage, there is a process to being approved for a home equity loan and yes, you can be denied for this loan. In some cases, it may even be the same lender who approved your original mortgage that denies your home equity loan.
There are several reasons why this could happen and we’re going to take a look at them.
Low equity in the home
Your home equity is how much you have paid off toward the value of your home. It’s not necessarily how much of your loan you have paid off because your home equity is calculated using the current appraised value, not the original loan amount. To determine how much equity you have in your house, subtract the amount of your existing loan from the current appraised value. For example, if you owe 200K on your home and the appraised value is 300K, you would have 100K of home equity. To determine your percentage, take that number divided by the appraised value: 100K/300K; you have 33% home equity.
A credit score below 620
A low credit score alone is not always enough for a lender to deny your application for a home equity loan, but it will factor into their determination. Lenders have different minimum requirements, but generally, a score of at least 620 is required.
DTI is too high
DTI stands for debt-to-income ratio, and it’s the percentage of your gross monthly income that you pay toward your debts. Again, this may vary by lender, but it should come in under 43% – 50% to be considered for a loan.
Unstable income source
A steady income source is one of the main ways a lender determines your creditworthiness. While most don’t have a stated income level they are looking for, if you are unable to show steady income through employment, investments, or spousal support, it’s unlikely a lender will approve your application. They need to know you will be able to make regular payments and spotty income history is prohibitive.
On-time payment history
In addition to credit and income, lenders will also look at your payment history on rent, loans, or mortgages. They are looking for a history of on-time payments with no defaults as an indication of your ability to pay in the future.
My home equity loan was denied, now what?
If your home equity application is denied, don’t give up hope. There are a number of things you can do before you reapply, but you should talk with your lender about why your first application was denied. They are legally obligated to give you the information that resulted in a denial. With this knowledge, assess your personal finances and see what fixes you can make so you’ll be on better footing the next time you apply.
There are some things you can do in the short term, but other fixes will take more time before you see their effects.
Short term strategies
There are some actions that you can take to help move your loan forward. Some short term strategies include:
Large down payment
If you’re able to make a larger down payment (15% – 20%) on a home purchase, you already have that much in equity. Not only that, you will lower your monthly payments, and increase your DTI. This will also look more appealing to lenders as it gives them more security in case of default.
If you’re able to, you could offer a high-value item like a vacation home, investments, or a business as collateral to help secure the loan you need. Consider this carefully, though, since this collateral becomes the lender should you default on the loan.
Get a co-signer
If your credit is less than stellar or you can’t show enough income to get to the right DTI, you can get someone else to co-sign on the equity loan with you. This will enable their income and credit to be used in the calculations and may boost you to where you need to be for approval.
Long term strategies
If you aren’t on a tight timeline for a home equity loan, there are some long-term strategies that you could try. These include:
Boost your credit
Improving your credit score is always a worthwhile task, but it can take months for it to start improving. Make sure you are paying every debt on time and making at least the minimum payments each month. Work to pay down your balances on credit cards and put your bills on auto-pay so you know you won’t miss a payment. Over time your credit will rebound.
Improve your income
This is easy to say and harder to do, but if you’re able to prove more income, you will increase your DTI ratio. Position yourself for a promotion, take on a side gig such as driving for Uber or delivering with DoorDash, or search out a better-paying job.
Pay your existing debts
The only way for your DTI to go down is to either show more income or have less debt. If you’re unable to increase your income, the next step is to lower your debt. Start with the loans with the highest rates, as the money you’ll save on interest will be better served to go toward paying down your other debts.
Talk to a home equity expert today
We are committed to helping the heroes of America in their homeownership dreams. This includes assisting with home equity loans. Talk with a specialist at Hero Home Programs™, contact us today. They will guide you to the right lenders and can help find vendors that your home equity may require, such as a home appraisal.