What to Do If You Can’t Get a HELOC

Financial Wellness By Noah - March 8, 2021

If your home is a major source of your wealth, you’re in good company. American homeowners have trillions of dollars of home equity available for them to tap into. That is, if they can find the right financing option. The problem is, some of the same economic upheaval that has increased homeowner interested in tapping equity (*waves at pandemic*) has also prompted lenders to hit the brakes. At certain points in summer 2020, new HELOC origination rates dropped as much as 99% from the previous year!

Finding cash to renovate your home or take other important financial steps can be challenging at a time when some lenders are skittish. If you're looking for liquidity, we’ve gathered the info you need to know about getting a HELOC, and where to look next if you’re struggling to find a lender who can help you.

How Do I Get a Home Equity Line of Credit?

A home equity line of credit or HELOC is a form of home financing that gives you access to a certain amount of equity. You can withdraw all or a portion of it during the draw period, and you make monthly repayments with interest, like on a credit card. A HELOC is a revolving loan, meaning you can borrow and repay the balance multiple times during the term of the agreement.

The interest rates on a HELOC can be fixed or variable, and are typically much lower than a credit card, which makes this an attractive source of funding for some homeowners. HELOCs generally carry low fees and are quick to set up, as well. But one significant downside to keep in mind is that federal guidelines allow lenders to suspend a borrower’s ability to withdraw from their HELOC under certain circumstances, even if they’re current on payments. This could result in you getting cut off from home equity funds exactly when you need them most, such as an unexpected loss of income.

In order to qualify for a HELOC, you generally need a debt-to-income (DTI) ratio of 40% or less, a credit score of about 620 or better, and a minimum value of equity in your home.  The better your credit history, the better the rate you may be able to obtain. Lenders will also only offer funding if your loan-to-value ratio, or the combined total of mortgage, second mortgage, and any other liens on the home, is below a certain threshold.

HELOC Calculator

If you’re pulling together financial options, the first step is gathering information. How much HELOC funding you can get depends on how much debt you have on your home.

Lenders look at your loan-to-value (LTV) ratio. They generally max out lending at a combined total of 80% LTV, meaning your remaining mortgage, HELOC limit, and any other debts on your house add up to no more than 80% of the value of your home.

Based on this, you can calculate an estimate of how much you could borrow through a HELOC or another loan. Start with your home’s value (e.g., $500,000). Next, review your outstanding mortgage balance, and divide it by the total value (e.g., $300,000 mortgage / $500,000 value is 0.6, or 60%). Calculate the difference between that number and the 80% LTV maximum (80 - 60 = 20%), and you should be able to estimate how much of your home value you could borrow (20% of $500,000 is $100,000).

Alternative Options to Home Equity Lines of Credit

A major downside to applying for a HELOC is that lenders may be much more hesitant than usual to approve borrowers. We’re coming up on a full year of coronavirus pandemic in the United States, and the effects have been tumultuous in more ways than one. Besides the obvious tolls in terms of loss of life and health across the nation, millions of people also lost jobs or faced income cuts and struggled to make ends meet with limited government aid.

Because a HELOC requires monthly payments, your lender will want to ensure that you'll be able to pay them on time every month.  But the people who could benefit the most from HELOC funds are often the people lenders are less likely to work with due to income interruption or a credit score dip. If you’re not getting approved for a HELOC but you need funds for home renovations or just to meet other financial responsibilities, you need to figure out an alternative source of financing that works for you.

Cash-Out Refinance

A cash-out refinance replaces your mortgage with a new mortgage that makes up a greater percentage of your home value. You pay off the original mortgage and keep the additional funds. Your new mortgage will likely extend the amount of time you’ll be paying off your house.

Cash-out refinancing can sometimes be a worthwhile option, especially if the new mortgage agreement comes with a reduced interest rate. Keep in mind that a new 0.5% adverse market refinance fee went into effect on December 1, 2020, so you need to add that to any other fees and costs associated with taking out a new financing agreement. And if you’ve been rejected for a HELOC, the same credit approval factors you were rejected for could make it difficult to get a cash-out refinance, too.

Home Improvement Loans

A home improvement loan is a type of unsecured personal loan. Some lenders may market home improvement loans separately from personal loans and possibly set restrictions on how you use funds (i.e., only for home-related expenses), while others may not set these limits.

Some advantages include that funds may be available faster than going through a HELOC, and you don’t put your home up as collateral. Homeowners with limited equity may have an easier time getting funding through a personal loan than through home financing.

Disadvantages include fees and high interest rates. Because the loan amount is unsecured, lenders tend to set higher interest rates, which can range from 6% to 36%. Lenders may also only offer these loans to borrowers with a strong credit history, since there’s no collateral to secure the loan. Before pursuing a home improvement loan, make sure you compare options to look for the most favorable rates available to you, and even consider whether it’s better to hold off on improvements until you can cover them in cash.

Noah Home Value Investment

Noah’s Home Value Investment offers funding in a lump sum, similar to a home equity loan. Noah is able to work with homeowners who are in mortgage forbearance, and a Home Value transaction can close in as little as 15 days, making it a fast and flexible option.

One important advantage of working with Noah is that there may be options for homeowners whose credit wasn’t quite strong enough to meet some lenders’ HELOC requirements. A Home Value Investment doesn't come with monthly payments, which makes it a great option for those who aren't W2 employees or fall shy of a 680 credit score. Instead of making monthly payments, the amount homeowners pay Noah when they exit their contract — up to 10 years from now — the amount you’ll pay Noah is tied to how much your home appreciates.  So unlike HELOCs and home equity loans, most homeowners won’t ever pay us more than the amount of equity they earn.

If you can’t get approved for a HELOC, this can come as an unpleasant shock at first. Fortunately, there’s a lot more to home financing than one option. It’s worth considering which financing partners have the flexibility to look at your entire financial situation instead of over-valuing one variable like credit. You may even discover that other types of home equity financing were a better fit for your needs all along.