Can I Get a Second Mortgage?
A second mortgage acts as a secured loan drawn from a home's equity that is subordinate to a primary (first) loan on a property. Homeowners take out second mortgages to finance home improvements, consolidate high-interest debt, take vacations and fund education costs. Second mortgages typically come with higher interest rates due to the increased risk of borrower default, although home equity lines of credit offer interest rates close to those of a traditional mortgage.
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Types
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Homeowners can choose between two types of second mortgages: loans and lines of credit. They can choose from a fixed- or adjustable-rate mortgage that allows them to cash out equity all at once. With a second mortgage, individuals have to pay closing costs, processing fees and usually cannot pay back the loan without facing prepayment penalties. A home equity line of credit (HELOC) allows a borrower to take a variable amount of equity out of her home with fewer costs and no prepayment penalties.
Employment
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Homeowners usually need two years of employment history to qualify for a second mortgage from a lender. Ideally, the applicant should have the same job for at least two years to demonstrate her financial stability, and the lender will verify employment history.
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Debt
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The lender will usually use a debt-to-income (DTI) ratio of between roughly 32 and 41 percent to determine whether a borrower can afford a second mortgage. The DTI ratio takes into account a homeowner's income and his current debts, including credit card payments, car payments and a first mortgage. For example, a second mortgage applicant who earns $2,000 a month with total debt payments of $500 a month has a DTI ratio of 25 percent.
Credit History
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According to Jessica Bennet of Mortgage Fit, banks take a larger risk with second mortgages, because the homeowner must first pay off the first mortgage in the event of default. For this reason, a lender will pull up an applicant's credit report to make sure that he does not have a history of late payments and credit defaults.
Equity
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Whether a homeowner can obtain a second mortgage depends on the total amount of equity in his property. While banks will loan up to 125 percent of a home's appraised value on a HELOC, lenders usually will only loan up to 85 percent of property value with a second mortgage, according to the Federal Reserve. For example, a homeowner who has paid off $50,000 on a $100,000 home note has 50 percent equity in her property. In this case, a homeowner will usually qualify for a $35,000 second mortgage depending upon the lending standards of the underwriting bank.
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