The Top 4 Reasons People Get Denied a HELOC
April 11, 2023byBrent Rasmussen, CMC, CRMS, CDLP, CVLS, CMAinHomeowner
Home equity lines of credit (HELOC) are a way for mortgage borrowers to access the equity in their homes without selling them. When used responsibly, HELOCs can be a fantastic benefit of homeownership, allowing homeowners to invest in necessary home renovations to increase the value of their home. However, qualifying for a HELOC can be difficult for some borrowers.
Reasons why people may be denied a HELOC:
1. Insufficient Income
One of the most common reasons for denial is a borrower’s lack of sufficient income. Even if a homeowner has significant equity in their home, lenders need to be confident that the borrower has the income to repay the loan. This is determined by the lenders’s rules of underwriting, which are established to prevent discriminatory practices.
2. Too Much Debt
Lenders will rarely approve a loan for someone who is spending more than 43% of their income on debt, including mortgages, car payments, credit card payments, and student loan debt. If a borrower is already carrying a lot of debt, lenders may worry that they will struggle to make payments on the HELOC in addition to their other financial obligations.
3. Low Credit Score
Lenders are requiring higher credit scores for HELOCs, with the best rates going to those with top-tier scores. Borrowers with credit scores below 680 may have a more difficult time qualifying for a HELOC.
It’s important to note that lenders also consider a borrower’s credit history in addition to their score. Borrowers with a history of late payments or other negative credit events may have a harder time qualifying for a HELOC.
4. Insufficient Home Value
While home values have risen in recent years, there are still many homes that are “underwater,” meaning that the total of all mortgage balances exceeds 90% of the home’s value. If a homeowner has too little equity in their home, they may not be eligible for a HELOC.
In conclusion, homeowners who are considering applying for a HELOC should be aware of the factors that lenders consider when evaluating their application. By understanding the potential reasons for denial, homeowners can take steps to improve their chances of being approved for a HELOC. This may include reducing their debt-to-income ratio, improving their credit score, or waiting until their home has increased in value. With careful planning and consideration, a HELOC can be a powerful tool for homeowners looking to make improvements to their home or consolidate high-interest debt.
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Brent Rasmussen, CMC, CRMS, CDLP, CVLS, CMA
Brent Rasmussen, the owner of Mortgage Specialists, is sole Mortgage Loan Originator in the United States to hold all 5 lending certifications (CRMS, CMC, CDLP, CVLS, CMA), distinguishing him as one of the most highly qualified experts in the field of home lending.
Having acquired decades of experience in mortgage lending, Brent is adept at educating his clients on the various mortgage options available, treating it as an investment and saving them both time and money. His objective is to simplify the process and make it stress-free, and he takes pride in his unwavering commitment to excellence.
Brent places great importance on education in mortgage lending. For the past 20 years, he has been licensed to instruct continuing education courses for both REALTORS® and Mortgage Loan Originators locally and nationally. In addition, he works as an adjunct instructor at the University of Nebraska at Omaha and owns MORE Education, LLC.
Brent has served as the President of several organizations, non-profits, and boards within his local community and nationally, demonstrating his commitment to making a positive impact.
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