There is a common misconception that a good credit score means that someone will surely be approved for a home equity loan. The truth is, rejection for a home equity loan isn’t exclusively for those with bad credit. A good credit score can prove beneficial and help someone get a mortgage approval but it is not a sure way to gauge whether you will be approved for a home equity loan or not. At the most, a good credit score is only one of the indicators that lenders use to determine if a potential borrower is capable of paying back a loan. If you have a great credit score and still got rejected for a home equity loan, any one of the following could be the culprit.
Consider Your Income to Debt Ratio
If you are not making a lot and racked up a significant amount of debt, then this could be why you got rejected for a home equity loan. Lenders will want to make sure that you can afford to have more loans given your current income status. They often have minimum and maximum requirements for debt in relation to income. Note that most lenders have a limit of 43% to 49% debt to income ratio.
Having Low or Unreliable Income
If you are self-employed or have a highly fluctuating income, some lenders will be very wary of lending to you as well. Traditional lenders see each loan as an investment. An investment that won’t pay off or may have problems is a bad investment for them. This is why lenders don’t just ask for existing bank balance or a statement of account these days, they want a solid proof of income that goes back months or even years more so if someone has an inconsistent or unreliable income source.
History of Bankruptcy or Foreclosure
Do you know that your credit score will be affected for a period of 6 years since the date your bankruptcy was completed? More so, filing for it twice will mar your credit report for around 14 years. This is why it is possible to get rejected for a home equity loan even though bankruptcy or foreclosure may have happened to you so long ago in the past and things are all going well now.
Get Approved for a Home Equity Loan
With the above factors said, you can still get approved for a home equity loan even when you’ve been previously declined provided that your financial situation improves. For example, once your credit score goes to between 300 and 900, it can show that you are capable of getting bills paid on time. Your odds will improve by a lot once your credit score reaches 680 because that is the minimum score most lenders go by. Note that an application denial and a repeated checking of your score have no impact on your actual credit score. You are free to apply again when you’re ready.
Are you unsure about applying for a home equity loan because of a previous denial? Contact us at Homebase Mortgages! Talk to our Canadian mortgage professionals so we can assess how to best assist you as well as what can be done to increase your chances of home equity loan approval.
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