How to Get a Second Mortgage for a New House

You must make sure you have enough equity to obtain a second mortgage.

Second mortgages are home loans that complement a first mortgage. In principle, they are the same as a first mortgage: they are liens that are secured by the value of your home. If you are a new homeowner and you need a second mortgage to consolidate bills, do home improvements or simply take cash out for a large purchase, you'll need to conduct ample research prior to applying for a second mortgage. There are many factors to consider.

Things You'll Need

• First mortgage documents (mortgage note, amortization schedule)
• Mortgage statement
• Income documents (W-2s, pay stubs)
• Appraisal or estimate

Instructions

1. Conduct an appraisal on your property or find an estimated value using an online source, such as Zillow (see Resources). The crucial element in a second mortgage process--especially with regard to a new home--is the home value.

2. Subtract the first mortgage balance from the value of your home. This is your available equity. Also calculate your loan-to-value (LTV) ratio. This is the percentage of your home's value secured by liens. To find your LTV, divide your mortgage balance by the value of your home.

3. Calculate your LTV with a second mortgage. Most lenders will not finance a second mortgage with an LTV higher than 95 percent. This is especially true in the wake of the 2008 credit crisis. For example, say your home is worth $175,000, you have a $140,000 mortgage, and you want to take out a second mortgage for $20,000. Your total outstanding liens will be $160,000. The resulting LTV is 88 percent.

4. Pull a copy of your credit report. You can get a free copy from Annual Credit Report (see Resources). Pay for your FICO score, too. FICO scores range from 300 to 850. Scores above 720 are excellent; scores below 600 are poor.

5. Research lenders based on your estimated LTV (with a second mortgage) and your FICO score. Stick to small banks and credit unions if you have excellent credit. Research finance companies, too, if your credit has some problems. Finance companies will charge more in fees and interest. Local lenders offer the most competitive rates and programs.

6. Narrow the list of prospective lenders and apply to only two or three lenders. Make sure to compare all second mortgage loan offers side-by-side. Look carefully at the fees charged, the interest rates offered and the types of interest rates available (fixed, adjustable, variable).

7. Choose the second mortgage offer that best meets your financial goals. Provide this loan officer with your existing mortgage documents, your income documents and the estimated or full appraisal. This will speed up the underwriting and approval process.

Tips & Warnings

• You may want to consider a full refinance instead of a second mortgage. Sometimes the most advantageous offers are those that wrap all mortgage debt into one loan.

References

• Bankrate: Refi Second Mortgage to Pay off Debt
• MSN Real Estate: What to Do When You're Late on the Mortgage
• MSNBC: Want a Second Mortgage? Good Luck!

Resources

• Zillow: Online Property Valuation
• Annual Credit Report