Second Mortgages
A second mortgage is an additional loan that is taken out on a property that already has a first mortgage in place. Depending on the reasoning for the second mortgage, it can be achieved through a bank in the form of a home equity line of credit or through a trust company or private lender. The key factors that determine the borrower’s eligibility are the equity in the property and their credit score.
Why get a Second Mortgage?
Second mortgages are a great way for home owners to consolidate debt from various places into one fixed payment. Though second mortgages interest rates are often higher than first mortgages, the rates will still be lower than credit cards, unsecured lines of credit, or vehicle loans. By consolidating debt into a second mortgage, it will help improve the borrower’s credit score which will help them qualify for a mortgage with a prime lender faster.
Qualifying for a Second Mortgage
Lenders will review four areas to qualify a borrower for a second mortgage:
Equity: The more equity the borrower has available, the higher their chances will be to qualify for a second mortgage. Home equity line of credit loans are issued up to 80% loan-to-value. Private lenders will typically loan to the up to 85%, however the borrower will be subject to higher interest rates.
Income: Just like for a first mortgage, lenders want to confirm the borrowers income to ensure they are capable of making payments. This can be achieved through pay stubs, notice of assessments, and employment letters.
Credit Score: The borrower’s credit score will determine whether the second mortgage will be obtained through a bank, trust company, or a private lender. The better the credit score, the lower the interest rates will be.
Subject Property: Lenders need to secure their investment in case the borrower defaults on their mortgage payments and they are forced to issue a power of sale. An appraisal from the lenders approved appraiser list will have to be conducted prior to getting an approval.