6 surprising reasons your home equity loan could be denied this October

Lenders may deny your application for reasons you didn't see coming, even if you have plenty of equity to tap into. Rabia Elif Akso/Getty Images

For many homeowners, the equity they've built in their homes is one of the most powerful financial tools they have. Thanks, in large part, to home values rapidly climbing over the last few years, the average homeowner now has access to over $300,000 in home equity, with many homeowners having even more to tap into. And, as other types of borrowing rates remain elevated, home equity rates remain low, which means that opting for a home equity loan is an increasingly attractive option for covering large expenses without selling your home.

But while plenty of homeowners have equity to borrow against, the reality is that not every home equity loan application gets a green light. Even borrowers with solid credit and significant amounts of equity can be surprised to find their home equity loan request denied. And in this unusual economic environment — marked by slowing home price growth, elevated inflation and tightening borrowing standards — approvals are far from guaranteed.

So, if you're planning to apply for a home equity loan this October, it's important to understand what lenders are looking for, but also what they aren't looking for. Some reasons for denial are obvious, like poor credit or insufficient equity. But others are less predictable and could catch even financially stable homeowners off guard. Below, we'll detail six surprising reasons your home equity loan could be denied this October (and what to do in response).

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6 surprising reasons your home equity loan could be denied this October

Here are some common but surprising reasons your home equity loan application might not make it through underwriting this fall:

Your income doesn't meet updated debt-to-income requirements

You may have been comfortably making your mortgage payments for years, but home equity lenders will still re-evaluate your income and debt obligations when you apply for a home equity loan. And, that can lead to big issues right now for certain borrowers, as many lenders have tightened their maximum debt-to-income (DTI) ratios in response to today's borrowing costs and a less certain economic outlook.

If your DTI ratio is too high — typically over 43%, though some lenders may set stricter limits — your home equity loan application could be rejected, even if your credit is excellent and you have a substantial amount of home equity. This can happen if your income has dropped since your original mortgage, or if you've added other debt, like auto loans or credit card balances, in the meantime.

Find out how affordable a home equity loan could be in today's rate environment.

Your home's appraised value came in lower than expected

Home values have surged in recent years, but that doesn't mean your property will automatically appraise at its peak value today. Appraisers have become more conservative in some markets, especially in markets where price growth has stalled or reversed recently.

If your appraisal comes in lower than expected, it could reduce your loan-to-value (LTV) ratio and cause your application to be denied, even if public estimates like the ones offered by Zillow suggest your home is worth more. This can be particularly surprising for homeowners who have made improvements and assumed it would boost their appraisal, only to find that local market trends weigh more heavily.

You have too much unused credit elsewhere

Lenders aren't just looking at your debt. They're also looking at your access to potential debt. If you have large unused lines of credit, multiple credit cards with high limits or other borrowing capacity that could theoretically increase your financial risk, some lenders may view this as a red flag.

This is especially true in an economic environment where lenders are cautious about extending additional credit to borrowers who could rapidly increase their obligations after a loan closes. So, even if you've never carried a large balance, just having high available credit can influence underwriting decisions.

Your employment situation changed recently

A new job, a shift to self-employment or even a recent promotion with a probationary period can trigger extra scrutiny by lenders. Home equity lenders want to see stable, predictable income. If your work situation has changed recently, even for the better, they may require additional documentation, and in some cases, may deny the loan altogether if they view the change as too recent or uncertain. This can surprise borrowers who assume that a higher salary automatically improves their application. If that income isn't considered "seasoned," though, it may not count fully toward qualifying ratios.

Your property doesn't meet underwriting guidelines

Your financials may be solid, but your property itself can still lead to a denial. This can happen if your home is in a flood zone and you lack the required insurance, if it has unique characteristics that make it difficult to value or if it's a mixed-use or investment property that doesn't fit the lender's criteria.

Certain property types — like manufactured homes, condominiums with financial issues in their homeowners association or homes with unpermitted additions — can also raise red flags. These issues may have little to do with your personal creditworthiness, but they can still derail an otherwise strong application.

You recently applied for other credit

Multiple recent credit applications over a short period can signal financial stress or increased risk to lenders. If you've recently applied for a new credit card, car loan or personal loan, it could temporarily lower your credit score or make lenders wary about adding more debt to your profile. In the current environment, where lenders are looking for stability, even small changes in your credit report can affect the outcome of your application.

The bottom line

A home equity loan can be a smart way to leverage the value of your home, especially with credit card and personal loan rates remaining elevated. But as lending standards evolve, approvals aren't guaranteed. So, before you apply, be sure to review your financial picture carefully. Check your DTI ratio, credit usage and employment documentation, and be realistic about your home's value. Addressing potential issues early can help you avoid surprises and improve your chances of approval.