Qualifying for a second mortgage isn’t quite what it used to be. Before the market when crazy in the late 1990s and early 2000s, just about anyone could qualify for second mortgage. In fact, many eager homeowners took out a second mortgage simply to be able to purchase their home in the first place.
Often leading to a situation of 100% financing, there was a lot of piggyback loaning going on. This means that 80 percent of the total was the first mortgage and a 20 percent second mortgage.
Although this isn’t something you’re likely to see today, it is still possible to get a second mortgage with good rates. Here’s how to qualify for a second mortgage and get the funding you need:
1. Understand how second mortgages work
You’re a lot more likely to qualify for a second mortgage if it is clear that you’ve done your homework. Before applying, you need to know the kind of situation you’re signing up for.
Understand that a second mortgage is junior in position to an existing first mortgage and that instead of refinancing a first mortgage by replacing it with a higher mortgage. A borrower may prefer to take out a smaller second mortgage. In this situation, if the costs to obtain the second mortgage are based on the amount borrowed, the costs associated with the loan will generally be less.
2. Note that your second mortgage could be larger
It is not necessarily the case that a second mortgage has to be less than the existing one. In fact, many buyers will be looking to base the size of their second mortgage on interest rate and payment amount. Don’t forget that a smaller mortgage also means lower closing costs, which will leave you with more cash when it’s all said and done.
3. Second mortgages are dependent on equity
Typically, a second mortgage will come in the form of a home equity loan or a line of credit, and therefore the most important requirement is home equity. You need to have built up at least some degree of home equity before you’ll be considered eligible for mortgage number two.
As a general rule, second mortgage lenders will allow you to borrow against up to 80 percent of your home value – that’s your primary and second mortgage combined.
4. A good credit score can qualify you for a second mortgage
A good credit score is likely to qualify you for a second mortgage. That’s more a rule of thumb rather than a law set in stone though. If you happen to have a very good credit score, for example, lenders will let you borrow against as much as 90, even 95 percent of your home value.
Good credit will also help you out because borrowers with lower scores will pay higher interest rates and face stricter home equity requirements than those with better scores.
5. Banks want tangible security
Unlike the feeding frenzy prior to boom time, lenders of today want to be able to secure a little more piece of mind before they sign off on a second mortgage. Before the housing market crash of 2008, a borrower could get a second mortgage up to 100 percent of the home’s market value.
Nowadays, they want to see that a home has equity before they’ll consider approving. They’ll be looking for hard numbers, appraised and backed by solid equity, before agreeing to a second mortgage.
6. You can refinance the mortgage
Similar to the option of refinancing a primary home loan, you can also apply the same process to a second mortgage. In this case, you’re simply going to take out a new loan and use it to pay off the old one at the same time. This is a fairly common scenario when it comes to HELOCs, or a home equity line of credit.
In this case, borrowers will often refinance as their draw period is coming to an end. This can be a wise decision as it allows for an extended draw period, of up to another 5-10 years. It also rolls the balance owed into the new HELOC, which provides the freedom of maintaining financial flexibility to be able to borrow and repay as they wish.
7. Roll your mortgage options into one package
In some cases, it might make sense for a borrower to refinance their primary and second mortgages at the same time in order to roll them into a single loan. In the event that there’s a better rate available than either of the current separate loans have, this makes sense. This is also a good solution if a second mortgage is presenting a challenge when it comes to refinancing the primary mortgage.
Subverting the original order, when a primary mortgage is refinanced, any 2nd mortgage becomes the new first lien unless it is resubordinated to the new primary loan. Due to the fact that some second mortgage lenders may be unwilling to do that, borrowers often simply roll them both into a new, single loan.
