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How Do Home Equity Lenders Approve a Loan? The first issue is your credit, which shows what kind of borrower you are, how much you owe, do you pay on time, if you've had a bankruptcy, judgment, repossession, or delinquent accounts.

Compensating factors can offset bad credit issues when processing your loan. For example, a low loan to value, or long term job stability are considered strong points. A good credit score allows the lender to offer a higher loan to value, loan amount, and a better rate. A low score means the lender may offset their risk by reducing the loan amount, or raising the rate. A good written explanation for credit problems can make a difference in getting a loan. Home equity lenders know that a temporary situation can cause late loan payments, such as, an illness that prevented you from working, or a job lay off that created a gap in your employment. Job stability is important, and is determined by how long you have been with your current employer, or how long you have been in the same type of work. A borrower that has changed jobs frequently, especially in different fields of employment, will be considered a higher financing risk. Lenders like to see a minimum of two years in the same job, or the same line of work.

Your ratio of income to debt must be within the allowable limits, depending on the specific home equity loan program. The total income used for the debt ratio depends on the source. Salary or wages are figured on a monthly basis, while overtime or bonuses will be averaged for the last two years. For self-employed borrowers, the net income on the schedule C will be averaged for the last two years. Other income may, or may not be included, depending the history of the income and how long it will continue. For example, a part-time job needs a two year history.

The loan to value also influences the loan decision. The percentage of equity relative to the value of your home is an important factor for loan approval and the interest rate. Some lenders have a maximum loan to value of 80%, while others will lend as high as 125%.

Tapping Into Your Home Equity
A home equity loan is a simple interest, fixed rate equity loan, secured by a lien on the legal title of your property. Home equity is defined as the difference between the current value of your home and the total amount you owe on the property.

At the close of escrow, a home equity loan has a one-time payment of the full amount of the loan, as opposed to a line of credit, which is an account that remains open for periodic withdrawals. Home equity loans can be a low rate source of money for consolidating high interest debts, remodeling or making home improvements, and cash out, with the benefit of a tax write off.

Because a home equity loan is secured by a lien on your primary home, it may be tax deductible within certain guidelines, which can be up to a $100,000 loan, or a maximum 100% of value. If a home equity loan is placed in second lien position on the property title, there is no need to pay off your existing first mortgage, and the payment terms will remain the same. Also, getting a new loan does not change the basis for property taxes on your home.

If you have an existing line of credit or second mortgage, it will have to be paid off with the proceeds of your new loan, so be sure to request a sufficient amount to include the pay off. When consolidating debts, you may benefit from converting compound interest on credit cards into a simple interest loan, and by changing non-deductible interest payments into a new tax write off.

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