You need money for home repairs, education expenses or credit card debt consolidation; you apply for a home equity loan and learn that you don't qualify. Home equity loan denial is a big disappointment, but you may be able to correct the situation depending on the reasons why your home equity loan application was denied.
Home Equity Loans and Your Home
- Insufficient home equity can cause your application to be declined. Home equity loans are connected with your home equity, which is generally defined as your home's current value less the amount of mortgages owed against it. If your house is worth $200,000 and your mortgage balance is $100,000, you would have approximately $100,000 in home equity. In general, lenders don't lend more than the combined loan-to-value ratio of 80 percent. Estimate your combined loan to value ratio by dividing the amount of your first mortgage and the amount you want to borrow for your home equity loan by your home's value. Using the example above and a home equity loan amount of $50,000, you would add $100,000 to $50,000 and divide the sum of $150,000 by $200,000. The result is a ratio expressed as a percentage. In this case, your combined loan-to-value ratio is 75 percent. In this example, you may qualify for a home equity loan if all other aspects of your application are acceptable. If your combined loan-to-value ratio is higher than 80 percent, you can reduce the amount you want to borrow and reapply.
- While home equity lenders may not require an appraisal of your home, they may order a home inspection. If major damage or code violations are discovered, lenders may decline your home equity loan request pending resolution of needed repairs.
Home Equity Loan Denial Caused by Credit Problems
- Compromised credit can cause your home equity loan application to be declined. It's a good idea to know your credit scores before applying. In general, home equity lenders look for minimum credit scores of around 620, but lender credit policies vary, so it pays to shop multiple lenders. Home equity lenders may also base a home equity loan denial on factors including liens and judgments, recent mortgage foreclosure or bankruptcy.
- Too much debt can crash your home equity loan application. There can be a "catch-22" involved in applying for a home equity loan to consolidate debt. Potential lenders may find that you have too much debt to qualify for a home equity loan. The Federal Trade Commission advises homeowners that adding more mortgage debt can put you at risk of losing your home if your finances are on shaky ground. Please consider consulting a HUD-approved housing counseling service for help.
Don't be discouraged if your first application is declined, as home equity loan denial is directly connected to individual lender requirements. Talk honestly with loan officers about your needs and any issues keeping you from getting a home equity loan. It's also important to shop and compare home equity loan quotes to find your best deal. Lender fees and costs vary. An easy way to compare loan costs is to look for the APR percentage on each loan quote. APR stands for annual percentage rate; it includes the home equity loan rate and lender charges expressed as an annual percentage of your home equity loan amount. Take notes and ask questions when speaking with prospective lenders; this can help you understand what lenders look for in a home equity loan application.