Home Equity Loan Denied? Here’s What You Can Do

Posted March 18, 2022 by in Lifestyle

Whether you want to repay a debt, purchase a new property, or take care of any other financial needs, a home equity loan can help you out. It’s an alternative financing option that lets you borrow money by using it as collateral without having to sell your property.

While an equity loan is an excellent tool for borrowing money against the equity in your property, qualifying for the same is subject to meeting the prerequisites. If you fail to meet the predetermined requirements, the lender will most possibly turn down your loan application.

However, it doesn’t necessarily mean that all the doors are closed for you. Read more to know all you can do if your home equity loan application is turned down. 

Why may you be denied a home equity loan?

Despite being one of the most readily available financing tools, it may not be as easy as you might expect to qualify for a home equity loan.

While there are a lot of deciding factors that determine if you’re eligible for a home equity loan, the top reasons why you may be denied are as follows-

  • The lender will require that you show proof of income or a steady source of income. If you have a low monthly income, your loan application will be denied unless you meet the specific income requirement of the lender.
  • If you are self-employed or own small businesses, the lender will want to see financial documentation to support your business’s revenue. You’ll need to show that you have enough cash flow to substantiate that you can afford to pay back the loan you borrow. 
  • You’ll need to substantiate that you can afford the loan payments by showing that your monthly gross pay adds up to at least three times what your monthly debt payment is. However, many lenders offer home equity loans at a debt-to-income ratio of 43% or lower.
  • Ensure to demonstrate that your debt to income ratio is within the preferable range to enhance the chances of your home equity loan application getting accepted. 

If there is any doubt in the lender’s mind about whether or not you’ll be able to repay the loan, they’ll most probably deny your application.

What should you do when your home equity loan application is denied?

There could be many reasons why a lender has denied your home equity loan application. However, there still are other options you can opt for to borrow money. Here are a few different ways to fund your dreams and needs, even if your home equity loan is denied.

  1. Cut down your ask amount

If the lender does not approve the loan amount you asked for, you can try again by asking for a lower credit limit or a higher APR. It can work out if the lender sees a higher credit risk with you. However, if you do not have enough equity available on your home, you cannot get a home equity loan at all. 

  1. Try a different lender

It is prudent to mention that different lenders, be it private lenders or banks, evaluate risks differently. As such, shopping around a little can sometimes work out and help you find a lender to borrow from, even if your application for a home equity loan was denied earlier. 

Home equity loan alternatives

Here are some alternatives to consider if you have been denied a home equity loan:

  1. Apply for a home equity line of credit

A home equity line of credit (HELOC) is similar to a personal loan. However, unlike a personal loan, you can use the funds in your HELOC for anything, including debt consolidation, home improvement projects, etc. It does not require you to pay back the balance all at once at the end of the term period.

  1. Take out a personal loan

If you’ve had trouble getting approved for a home equity loan in the past, you can consider applying for a personal loan. However, be aware that personal loans are typically more expensive than bank and secured loans as they’re unsecured. So there’s no collateral security involved unless you put something else up as collateral like stocks or bonds etc.

  1. Credit card

If you demonstrate an excellent credit score but low equity in your home, you can consider applying for a credit card with a great expending threshold. However, credit cards have even higher interest rates. 

Long-term solutions

These long term solutions to home equity loans could bail you out of financial trouble:

  1. Turn your house into a rental property

You can also generate a passive income by turning your house into a rental property. Now, if your house is not big enough, you can always try turning it into an Airbnb or vacation rental.

  1. Improve DTI

Your debt-to-income ratio represents how much of your monthly earnings go into paying debts. If the majority of your income goes towards paying for the debts, the chances are that a lender will turn down your home equity loan application. Therefore, take some time and try to close the existing debts to be eligible for a home equity loan.

  1. Have patience

If it’s not extremely urgent, it can be best to wait for a few months or years as it will allow you to repay your home loan further and enhance the available equity on your home. It will again make you eligible to borrow against the equity available on your home.


A home equity loan is a type of financing that allows you to borrow money or purchase assets such as a new home or business without selling your property. Home equity loans are popular and convenient financial options for Canadians who want to buy a bigger home or start their own business. 

However, some people aren’t able to qualify for a home equity loan and end up having to pay higher interest rates on other loans, which can be pretty pricey over time. Nonetheless, you can resort to the alternatives above to avail the funds and fulfill your necessities.