Second Mortgages

Let’s start with an easy, simple explanation of what a second mortgage actually is: more than one loan or lien against a property. Second mortgages can come in a few different forms, and there can also be 3rd and 4th mortgages as well, but these are very uncommon.

Most of the loans or liens taken out against a first mortgage are home equity loans. With a home equity loan, the terms can vary and can be up to 30 years. Second mortgages can also be referred to as secured loans. This name comes from the security that the lender gets out of the loan since the borrower is pledging the home as collateral for the loan. Since the creditor has relieved most risk from the loan, seeing that they can take the property in the event that the debt is not properly paid, it allows for more favorable terms.

A HEL (home equity loan) and a HELOC (home equity line of credit) are different from each other. A HEL is a lump sun of the loan that is often at a fixed rate. These are used in such things as making home repairs and paying off medical bills or student loans. A HELOC is a line of revolving credit usually at an adjustable rate. This is most similar to a credit card and can have a minimum payment of the interest only.

Things that are considered when applying for a second mortgage:

The first thing is that there must be significant equity in the 1st mortgage. This is calculated by the difference between what the house is worth and what you owe on it. For example, if you bought a house worth $250,000 and made a down payment of $50,000, then the equity in the house would be $200,000 ($250,000-$50,000). Keep in mind that appraisal value of the home will determine how much the house is worth at that moment, which is all the bank really cares about.

Low debt-to-income ratio (DTI). DTI is the percent of your income that is used to pay the debt that you have acquired. You can determine your DTI by first seeing how much monthly income you have. This will be a product of your most recent pay stubs. Then simply divide that by your total monthly payments towards debt. There are two different kinds of debt that are important to consider. One is revolving debt accounts. These are things such as credit cards that never have a specified ending date because you could pay them off and then continue to incur debt with them. Installment debt accounts have a certain ending date. Things like home loans, car loans, and student loans are examples of installment debt. When banks are looking for your DTI, they will allow you to pay down installment debt to improve the DTI, but not revolving debt.

High credit score
Excellent – 740 and Over
Good – 700-739
Fair – 660-699
Poor – Below 660

It is also important to have a solid employment history.

Subordinations

A subordination of a loan is just asking a junior lender to stay in a subordinate position while the main mortgage is being refinanced or restructured. It is cheaper to subordinate a second loan than to create a new one. It is important that your loan originator knows if there is subordination from the beginning. This is because subordinations usually slow the loan process down a good bit. Since your loan has to be locked in at a certain time, if the subordination does not go through in time, you will have to worry about fees for lock extensions. Different lenders have different requirements for subordinating, but the requirements are all things included in the loan process. There is, however, a subordination fee that also depends on the lender that is subordinating. As with anything loan-related, there is always a possibility that the subordination might be declined due to a high loan to value.

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