No one likes being turned away even when it comes to financial matters where your hope has been raised as the only alternative to get you out of a situation. That is why it may be unappealing if you are denied a loan from a bank or private lender. So, can you be denied a home equity loan? Definitely, the same goes for business loans, personal loans, and auto loans.
If your application has been denied, then the first thing you need to do is find out why it wasn’t approved. The next is to go ahead and retrace your steps and try to fix what was wrong before reapplying. Finally, you need to avoid doing what must have warranted such in order to wade off denials in the near future if there’s ever a need for a loan.
What is a Home Equity Loan?
A home equity loan is a second mortgage which you obtain from a lender by using the equity in your property as collateral. Equity, in this case, is the share that you actually own in your home if you have relied on a loan to obtain it.
For instance, if you were lent $50,000 to purchase your $100,000 home, then your equity is 50 percent since the lender owns the other half. Since you have an equity of $50,000, you can take that out to be offered as collateral in your second mortgage loan. At this point, it means you no longer have any equity unless the value of your home increments or you start paying the capital of either loan.
A home equity loan has a fixed rate and it can be offered to people with excellent or bad credit score. The interest rate will be higher in comparison to the first loan since the primary lender has more stake and the secondary lender will like to find a way to take less risk. Nonetheless, the rates are much cheaper compared to taking an unsecured loan or a secured loan.
Some benefits of home equity loans are:
- Tax benefits
- Low home equity rates
- Monthly payments are stable
- Home equity loan is amortizing
Reasons Why Your Home Loan Was Denied
There are several reasons that can be attributed to the denial of a loan and while some have been listed below, it is better to find out from your lender. They will be in a better position to tell you why you were turned down and give advice on how to make the situation. These aside, take a look at the following major reasons.
- Credit score
- Too many Debts
1. Credit score:
Private lenders whether online or offline use your credit score to judge if you are credible enough to be entrusted with a certain amount of money. A look is taken at high credit card debts and defaulting on previous loans which is calculated to arrive at a score. Depending on the lender, the minimum score they might require before they lend to you is 580 to even 700.
If your application was rejected because of your credit, then it is your lender’s duty to provide you with a notice of adverse action. In it, the reason will be pointed out whether it is due to your credit from having defaulted. Nevertheless, this might not be the case, given that some of the best home loans companies offer loans to people with poor or bad credits. The only problem is, their interest is usually higher.
The ability of lenders to earn will come from the interest you’ll be paying on a monthly basis, that is why lenders of a mortgage, personal loans, secured loans, and what have you take a look at your income. Lenders use the debt to income ratio to ascertain if you’re making enough to be able to spend monthly on interest without defaulting.
Lenders know that one of the best ways to reduce the risks in their business is to receive collateral. That way, if the borrower defaults, there can be a way to make amends. In such a case, a secured loan will be issued even though most people may require an unsecured one where their property is not tied to it. If your collateral is not equivalent to the amount you’re going to borrow, then your application can be rejected.
Likewise, if you’ve opted for a small business loan, you may be required to run your business for at least 1 year before your loan can be granted. This and many more are what Federal and private lenders take a look out before finally giving you some money.
4. Too Many Debts:
If you’ve taken a Federal loan, private loan, and still looking for another, your lender might think twice. Likewise, if over 43 percent of your income is spent on debt, then the lender will be less than willing to oblige to your request because the higher your financial responsibility, the harder it is to manage. On the other hand, there are lenders that offer consolidation where your debts can be merged to form a new one on a different interest rate.
Now that you know that you can be denied a home equity loan and the reasons why that could be, you can be better positioned before applying. Alternatively, if your application has been rejected, then improve your credit score while you source around for some of the best lenders that approve people with bad or fair credits.