Many homeowners long to hear the magic words, "your home equity loan is approved." But for most, this type of loan, which allows a homeowner to borrow against the equity in the home, is hard to get.
The typical barriers are lack of equity, impaired credit, and inadequate income to support additional borrowing. Of those, negative equity, also referred to as being "upside down" or "underwater," may be the most daunting.
Homeowners who have equity, a strong credit score and enough income to support a second loan payment may still find only limited options.
That's mostly because of changes in the lending industry, said Shari Olefson, a real estate lawyer in Fort Lauderdale, Fla., and author of Foreclosure Nation. Those changes, Ms. Olefson said, include the following:
● Fewer lenders, loan officers, mortgage brokers, and companies that used to heavily promote home equity loans.
● Stricter government regulations, requiring lenders to hold higher reserves and generally constraining all types of lending.
● Short sales, foreclosures, and borrowers who have decided not to make their payments, even though they can afford to do so.
Lenders that offer equity loans may charge higher interest rates to offset those perceived risks.
Some lenders still approve home equity loans for homeowners who have enough "borrowing power," said Gary Korotzer, senior vice president of marketing for home equity at Wells Fargo in San Francisco.
That power consists of collateral, which refers to the home's value as determined by an appraisal or automated-valuation model, and capacity, which refers to the borrower's income relative to debt obligations, Mr. Korotzer said.
"The best thing to do," he said, "is to come in and talk to a banker about your situation. At the end of the day, it's a combination of factors, and you should have a conversation with someone who can guide you through the process."