Investors who are associated with the real estate industry are well-versed with various types of loans and mortgages that often help them to finance investment properties. However, not everyone is aware of the second mortgage, which is also an alternative way to arrange funds.
As the term suggests, second mortgages are a form of a loan, which is allotted on a pre-mortgaged property. Meaning, you can apply for a second loan for a property, which is already under the mortgage. Since second mortgages are riskier than the first mortgage lenders impose stricter guidelines for this. In this blog, we will talk about the private second mortgages in detail, along with the ways to find a lender for bad credit.
What is Second Mortgage and How Does It Work?
If you are an investor, you may not want to apply for a second mortgage unless it is an emergency. Second private mortgages are a hassle, and not so many investors are willing to apply for them. However, since property investment is an expensive venture, you may need to apply for a second private mortgage to meet your financial goal.
You can consider a second private mortgage a form of subordinate loan taken against an original mortgage, which is in effect. If the borrower turns a defaulter, the mortgaged property will bear the burden of unpaid dues.
In the case of second mortgages, the borrower will have to repay it once the amount of the first mortgage is complete. For this reason, the interest rate for the second mortgage is higher, and the amount obtained will be lower than the first mortgage. Have a look at some key takeaways about private second mortgages:
- A second mortgage is an additional loan taken on an already mortgaged property
- Rate of interest is higher than the primary mortgage
- The loan amount is lower than that of primary mortgage
- A second private mortgage is suitable to finance large properties
- Not all the lenders offer this type of subordinate loans
How Does It Work?
The First Mortgage
In most cases, people opt for a home loan whenever they decide to purchase a property. Lending institutions like banks or mortgage brokers approve the loan application taking the property as collateral, and we call it a mortgage or the first mortgage.
In this process, the borrower repays the loan amount through monthly instalments over a certain period. As the borrower gets closer to repaying the obtained loan amount, the value of the target property is appreciated economically.
The Second Mortgage
During the process of repaying the first mortgage, a property owner may apply for a second financial package from a lender based on his/her home equity. The financial package or loan, the property owner decides to take against home equity is called the second mortgage. The amount for the second loan will be a percentage of the repaid amount from the first mortgage.
Like any form of loans, the second mortgages taken against a first mortgage property must be repaid within a certain period. The borrower cannot apply for another loan against the home equity until the second loan is clear.
Home Equity Line of Credit
The home equity line of credit is also an option to obtain funds from financial institutions. The home equity line of credit or HELCO is like a second mortgage. You can call it a circling line of credit, which is secured by the home equity.
Your HELCO account will look much like a credit card account out of which you can borrow a certain amount and repay the amount monthly. One of the upsides of HELOC and second mortgages is that the interest rate for this borrowing is lower compared to interest rates on new debt and traditional credit cards.
Use of Second Mortgage
If you are new in this landscape, you may wonder about why investors often prefer to apply for second mortgages. In general, investors apply for the first mortgage to purchase an income property or primary residence. In some cases, investors use second mortgages to finance large expenditures.
Also, an investor can use a second mortgage to consolidate his/her debt. An investor can use the money obtained from the second mortgage to clear the outstanding debt, where he/she might have been paying higher interest rates.
Both Mortgages Use the Same Property as Collateral
Both the first and second mortgages use the same property as collateral. However, the first mortgage will always get priority on the security or collateral. If the borrower turns defaulter, the lender of the primary mortgage will get compensation first. Hence, we can say that the second mortgages are considered riskier for lenders than primary mortgages.
How to Qualify for Second Mortgages?
Since second mortgages are riskier than primary mortgage loans, lenders that offer second loans on a mortgaged property, come with strict criteria. Have a look at the factors you need to overcome to qualify for a second mortgage.
- Equity: Home equity is going to play an important role, as the most home equity you will come with, the higher your chance will be to qualify for the second loan.
- Credit Score: If anapplicant comes with a good credit score, he/she will be eligible to enjoy lower interest rates
- Income: Before approving the second loan to an applicant, lenders want to ensure that the applicant has a reliable and steady source of income.
- Property: Since the second mortgages are riskier for the lenders, they will always want to secure their investment. Lenders will evaluate the current market value of your property before making you qualified for the second loan.
Whether it is a first mortgage or second, lousy credit score can take a toll on both. Bad credit scores can become a significant obstacle in the process of getting qualified for the second mortgage. A bad credit score, however, is not the end of everything. Opportunities are still there, and you can grab them by following a few simple steps. Here are some ways to find mortgage lenders for bad credit.
Find Mortgage Lenders for Bad Credit
- Direct Lender: Direct lenders can be a viable option for investors seeking a second mortgage facility. They are wealthy organizations, and they can offer you loans with less processing cost.
- Mortgage Brokers: A qualified mortgage broker can come with various loan products to help you to choose one based on your financial status and objectives. The best benefit of working a broker is that they can bring multiple products offered by different lenders. Also, they welcome investors with bad credit and make everything feasible for them.
- Shop Around: This can be a proven way to reach the best lender to get qualified for second loans. Simple market research and comparison between the traditional banks and brokers will help you to choose the right partner. You can prepare a list of 4-5 mortgage sources and compare interest rates, loan amount, closing costs, lock-in fees, additional fees, repayment penalty and all other vital aspects that can become a significant factor during the process of repayment.
Second mortgages remain a popular option for investors seeking financial assistance to purchase large properties. Applicants with good credit score and loan history are more likely to obtain such loans. The loan amount for the second mortgage will be less than the loan amount received in the beginning. Although investors with a good credit score will find it easy to qualify for a second loan, and individuals with bad credit can also apply for second mortgages with the help of financial advisors or mortgage brokers. Hence, find the best broker and discuss the ways to get qualified for the private second mortgage even with bad credit. Remember, whenever choosing a broker; never forget to check the license, experience and reputation.