It’s pretty common to hear about homeowners being rejected for a home equity loan when they have bad credit. But did you know that you can still be rejected for a home equity loan even if you have good credit?
Good credit can help you qualify for a mortgage, but it doesn’t mean you’ll automatically qualify for a home equity loan. While a good credit score is one indicator that shows lenders there’s a good chance you’ll be able to pay the loan back, it’s not the only thing they look at. Below are just some of the reasons why the big banks and trust companies could reject your home equity loan.
Income vs. Debt Ratio
When you qualified for a mortgage you likely had a good credit score and probably low debt levels. But circumstances can change quickly. Racking up unexpected debt and a change in your income level could be one of the reasons why your home equity loan was rejected.
When you apply for a home equity loan with a traditional lender, they look at how much you earn and how much debt you have. This helps them decide whether or not you can afford a new loan.
On top of that, traditional lenders have minimum and maximum requirements for income and debt. If you don’t meet that threshold, you’re going to get rejected. For most traditional lenders, the debt-to-income ratio is 43% to 49%. That ratio is the percentage of monthly gross income that goes toward paying your debt.
Unreliable or Low Income
How much you make doesn’t impact your credit score. It can, however, get in the way of obtaining a home equity loan. If your job situation has changed and you make less than you did before, your loan application could get rejected.
You could face the same challenges if you’re self-employed too. A lot of Canadians are entrepreneurs, and that’s an issue for traditional lenders. Over the last number of years, Canada’s big banks have implemented a number of strict lending rules that put self-employed Canadian homeowners at a disadvantage.
In the past, self-employed Canadians and those with unreliable, inconsistent income simply had to state how much they made. Not anymore. Now they have to prove it.
If you’re self-employed, you understand that, for tax purposes, you might draw a smaller income. That decision will come back to haunt you if you use a traditional lender for a home equity loan.
If you’re self-employed you also know that income streams can be unreliable and inconsistent. That too could be why you were rejected for a home equity loan.
A Foreclosure or Bankruptcy
If you’ve filed for bankruptcy or experienced a foreclosure, it will impact your credit score for six years from the date your bankruptcy was completed. If you’ve filed for bankruptcy twice, it could last on your credit report for 14 years.
That means, that even after you’ve recovered from your bankruptcy and repaired your credit score, traditional lenders could still decline your home equity loan application.
FAQ’S about Mortgage Declined with Good Credit Score
Q. What is a good credit score for getting a home equity loan?
The credit score requirements for a home equity loan vary depending on the institution and amount. The bigger the lender and loan, the stricter the lending rules. Credit scores (300 to 900) show how likely you are to pay your bills on time. The higher the score, the lower your odds are of defaulting. To get the best rate, some lenders insist on a minimum score of 680.
Q. Does being denied a loan affect my credit rating?
No. Being denied a home equity loan will not negatively impact your credit score. Your credit report will show that you made an application, but it doesn’t show if your application was approved or denied. In fact, no borrower can access that kind of information.
Q. Doesn’t checking my credit score impact my credit score?
Yes and no. There are two different types of inquiries: hard and soft. A hard inquiry is made when you apply for credit or a loan. A soft inquiry is when you request a copy of your credit report.
With a hard inquiry, a lender looks at your credit score and determines whether or not you will be able to make the monthly payments. The inquiry only includes the name of the lender that checked your credit and the date of the inquiry. It does not show whether you were approved or not.
Your credit score can be affected by the number of recent inquiries. Each new inquiry that occurs over a short period of time can knock a few points off your credit score. That only happens because it shows you are trying to take on new debt.
Being docked a few credit points is not as dire as it sounds, and it disappears over the course of a few months.
The only way it could affect your credit score is if you make a lot of loan inquiries over a short period of time. Applying for a home equity loan with a number of lenders could make you look like a credit risk.
Canadalend.com, Helping Canadians Secure Home Equity Loans
If you have good credit and have been denied a home equity loan, contact a mortgage expert at Canadalend.com. The mortgage specialists at Canadalend.com are independent, this means we have access to hundreds of different lenders—lenders that specialize in helping those who have been turned down by traditional lenders access the equity they’ve built up in their homes.
How can we provide better service than traditional lenders? Canada’s tighter lending rules only apply to Canada’s big banks. Alternative lenders, like the ones Canadalend.com work with, are not bound by the same lending rules.
Many of the lenders we work with specialize in providing home equity loans and mortgages to those who are self-employed, have a recent employment history, bruised credit, no credit, unreliable income, or even declared bankruptcy.