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Why Getting a Second Mortgage is More Difficult

Why Getting a Second Mortgage is More Difficult

You have owned your home for several years and have seen it appreciate in value. After five or more years of mortgage payments, you’ve also seen your mortgage pay off amount drop. Likely, you have built up a good amount of equity in your home, enabling you to take out a second mortgage to handle a desired expansion or upgrade.

Mortgage Considerations

As challenging as it was to put together your first mortgage, a second mortgage may be even more difficult to do. Such mortgages, typically a home equity loan or a home equity line of credit, are often for a much smaller amount than your original loan. Still, getting a second mortgage is more difficult and for the following reasons.

1. Tighter lending standards. You may have obtained your fist mortgage before the housing slump hit in full force around 2007. Before then, banker and mortgage broker lending standards were more relaxed, making it easier for you to become a homeowner. Changes in those standards have tightened up lending across the board, therefore your application process amy be much more rigorous this time around.

2. A greater risk. If you default on your loans, the first mortgage holder has first dibs on your property. The second mortgage company can be left to twist in the wind, therefore the risk is greatest for that lender. Greater risk means deeper scrutiny of your credit as well as your ability to repay this loan.

3. Your credit score. Unless your credit score is excellent, you may find that obtaining a HEL or a HELOC is not possible. There are a number of factors lenders look at when considering extending credit. A credit score of 700 may not be enough to gain you approval, with a score of 750 or above preferred by some lenders. Shop around to find a lender that is willing to work with you.

4. Your debt load. If you have too much debt, your banker may not approve your HEL or HELOC request. A second mortgage will put you deeper in debt, a fact not lost on lenders. You may be able to get around this problem by allocating some money to pay down what you owe. Student loans and massive credit card debts are warning signs to lenders. Pay off or pay down as much as possible before applying.

5. Your home’s value. Maybe your home has not appreciated as much as you thought. You might have purchased it before the market corrected itself, leaving you with a home that has very little equity in it. Lenders will examine what they believe your home is worth and look at what you owe on your first mortgage. If the difference between the two is negligible, do not expect to receive approval for a second mortgage.

Second Mortgage

While a second mortgage can certainly come in handy for some homeowners, it does not come without some risks. Learn what your monthly payments will be as you take out this loan and update your budget to find out if you can afford the new debt. If not, then do not move forward.