A second mortgage, also known as a home equity loan is exactly what it sounds like it should be. These loans are taken out along with or in addition too a first mortgage. Second mortgages are subordinate to the first mortgage because if the loans should ever go into default the first mortgage gets covered before the 2nd mortgage. This makes the second mortgage a much riskier bet for the lender and often will result in a higher interest rate than the first mortgages.
Like other mortgage products, second home mortgages have varying term lengths. They can have terms as far out as 30 years or as short as a year. It is important to know how you 2nd mortgage is structured when deciding on the type of loan you need for your particular situation.
One thing to take into account when looking at 2nd mortgages is to determine if the loan will be considered a recourse or non-recourse loan. With a non-recourse loan the borrower is not personally liable for anything above the home’s value at the time when the mortgage is repaid. While the lender of a non-recourse loan can recoup some loses through foreclosure, they are not able to sue the borrower for additional money. However, second mortgages and home equity lines of credit are often considered recourse loans. With a recourse loan the lender is allowed to come after the borrower in the case of a default. The lender, even after they have taken your collateral, can bring a legal case against you for the total amount you owe. This could even lead to a garnishment of your wages or being sent to collections. For this reason it is important to make sure you are taking out the second mortgage for a good reason and have the cash flow needed to easily pay the added mortgage payment each month.
What Does a Lender Look for When Considering a Second Mortgage Application?
Amount of Home Equity: A lender will want to make sure you have enough equity in the home to not only cover the amount of the loan but that you also leave a sizeable cushion. As we have seen before, a downturn in real estate prices can easily eat away a homes equity leaving some homeowners underwater which can dramatically increase the chance of default or even foreclosure on a property.
Debt to Income Ratio: Lenders will want to see that your current debt-to-income ratio is low so they can feel confident you will easily be able to make the added payments brought on by taking out the second mortgage.
High Credit Score: A high credit score will show the lender you are a responsible borrower. With credit standards tightening over the last few years many mortgage professionals are raising the minimum credit score requirements so it is important to maintain a healthy credit history.
Employment History: When applying for a second mortgage lenders will want to see that you have a solid history of steady employment. With unemployment high lenders are becoming more conservative in there lending and want to feel secure in knowing that you have a steady income stream to pay for your mortgages.
While there are some things you need to be aware of when looking at second mortgages, they still can play a large roll in your financial picture. Take a moment to compare rate quotes from local lenders who are ready to work with you to find the best 2nd mortgage rates possible.
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