What Disqualifies Borrowers from Getting a HELOC?

To even be considered for a home equity line of credit (HELOC) you must first own a home and have built up at least 15 to 20 percent equity (or more depending on the lender and your credit). If you don’t own a home or just recently purchased a home and have yet to reach the necessary threshold for your lending institution, you won’t qualify for a HELOC.

While home ownership and the equity threshold are the most obvious requirements for HELOC eligibility, they’re not the only factors that might impact your chances for approval.

Credit History

Like all other secured and unsecured loans, your credit history will influence a lender’s decision to approve your loan and will dictate the interest rate for which you qualify. Every lending institution is different, but most home equity loan and HELOC lenders want borrowers to have a minimum of a mid-600 credit score. Every lender is different, and some may only approve borrowers with a minimum of 660 to 680, while reserving the best rates for borrowers with credit scores in the 700s or higher.

Inadequate Income

Credit scores aren’t everything. Lenders will also want to confirm you have adequate income to make interest and principal payments on your HELOC and your existing debts. You may struggle to get approved if your income is too low, sporadic or if your job is relatively new.

High Debt-to-Income Ratio

Your debt-to-income ratio is the percentage of your income that goes toward paying your debts each month. If your debt-to-income ratio is too high, lenders may be concerned about your ability to make your payments. Many lenders look for a debt-to-income ratio of 43 percent or lower.

Negative Amortization

If your current mortgage has negative amortization (meaning the loan balance is increasing over time instead of decreasing), you may be disqualified from getting a HELOC or home equity line of credit. This can happen if you miss payments, don’t make large enough payments each month or if you have an adjustable-rate mortgage (ARM) that allows for lower initial payments that don’t cover the full amount of interest due each month.

Increasing home loan balances can eventually result in your loan becoming underwater, eliminating your equity and your ability to borrow against it.

Past Bankruptcy or Foreclosure

Having a bankruptcy or foreclosure on your short- to mid-term credit history will likely make it difficult to qualify for all types of loans, including HELOCs. These marks against your creditworthiness are not permanent, but they also don’t vanish overnight. It may take several years for your credit to recover. The team at OnPath Federal Credit Union may be able to help (credit counseling is one of the many perks of OnPath Credit Union membership).

Inconsistent Employment History

Lenders often prefer borrowers who have a stable employment history. If you've recently changed jobs or have gaps in your employment, this could potentially impact your ability to get a HELOC. This can make life a little more complicated for the growing number of freelance and contract workers who may have adequate annual income but inconsistent pay periods. If you’re confident your income should qualify but are having trouble getting approval due to your seasonal or contract employment, give our mortgage experts a call.

What Can You Do to Increase Your Chance at HELOC Approval?

Work on Improving Your Credit Score

Doing the basic things like paying all your bills on time, paying off your credit card balance each month and never missing car, mortgage or student loan payments can help. Also stay apprised of your credit ratings and promptly dispute inaccuracies if they ever show up on your reports.

Look for Ways to Stabilize Your Income

This can be easier said than done for independent contractors or gig workers, even those who have adequate income, equity and a healthy debt-to-income ratio. Maintaining a stable income for a few years and ensuring you find another job quickly if you lose one can help increase your creditworthiness in the eyes of many lenders.

Maintain a Healthy Debt-to-Income Ratio

This isn’t always easy if you currently have a lot of debt, but taking steps to pay off loans and getting your debt-to-income ratio below 43 percent can help your borrowing eligibility in the future.

Grow Your Home Equity

HELOCs are essentially a way to access the equity you’ve already built in your home, so having adequate home equity is a requirement for HELOC qualification. If your equity is currently too low or you’re facing negative amortization, taking steps to rectify the situation is a good first step.

Find a Lender Who Will Work with You

New Orleans has many banking options, including OnPath Credit Union. If you’ve been turned down by national banks or you’re not satisfied with the rates or services you’ve received from other lenders, call our mortgage professionals 800.749.6193. We’ll be happy to explain our HELOC options and see if you qualify.