What to do if you are denied a HELOC or home equity loan

by EV Atlanta

Boost your credit score

If your credit score is 700 or above, you’re in a good position to get approved for a HELOC or HELoan. In fact, the average score for people who got HELOCs in the first quarter of 2024 was 770, according to Home Mortgage Disclosure Act data.

“Surprisingly, many folks are not as aware of their credit score as they probably should be,” says Ralph Herrera, Realtor and senior real estate advisor at Engel & Völkers Atlanta, a real estate service provider based in Georgia. “Folks don’t pay attention to that until maybe it’s too late. A little bit of planning in advance is helpful to prepare.”

If your credit score was the reason for denial, start by reviewing your credit report for any errors that could be affecting your score. Dispute any inaccuracies with the credit bureaus. Additionally, enhance your chances of approval by paying down your debt, making payments on time, and steering clear of opening new credit accounts.

Reduce your debt-to-income ratio

When applying for a home equity loan, lenders check your debt-to-income ratio (DTI) to ensure you can comfortably handle the extra obligation. DTI is the percentage of your monthly income that goes toward paying your regular, monthly debts.

A high DTI can be a significant obstacle in getting approved for a HELOC and a HELoan. Most home equity lenders look for a DTI ratio no greater than 43 percent, and the median DTI of a HELOC borrower was 41 percent in Q1 2024 according to HMDA data. “With property values being high, if someone bought a house within the last couple of years and their interest rate is higher than those prior to that, then borrowers are running into some DTI challenges,” says Hutchens. (Indeed, the median HELOC borrower’s DTI was only 32 percent in Q1 2021.)

To improve your chances of approval, work on reducing your existing debt by paying off high-interest loans and credit cards. Increasing your income through extra work or negotiating raises are other ways to lower your DTI.

Read more here. This article was also featured on AOL and Yahoo! Finance.