Two mortgages may seem like too much debt to carry, but if you qualify, it can be financially beneficial. Whether you have two mortgages on a single property or two properties with a single mortgage, you have to meet the bank's income and collateral standards. If you can do that, you can carry two mortgages.
Your credit history is one of the first items a lender looks at. Credit scores range from 300 to 900. If you have a poor credit score, typically under 620, you are considered a high-risk borrower. Lenders will be hesitant to grant you a first mortgage, let alone a second. If you also have a history of late payments on prior mortgages along with judgments, collections, garnishment or foreclosure, it will be very unlikely you will be approved for a second mortgage. Even if your credit history is good, but you have a poor history with that particular lender, the underwriter may hesitate to approve you unless you can provide an acceptable explanation for your past delinquency.
To carry two mortgages, you must be able to afford the payments on both. When you apply for the second mortgage, you will give the bank two years of W-2 forms and federal tax returns along with one month of pay stubs. The bank will run your credit report. Using this information, the bank will tally up your monthly debt including bank loans, credit card debt and auto loans. It will add in the payment on both the first and second mortgage. It will then calculate your total monthly income. It will divide your debt by your income. No more than 40 percent of your income should go toward debt. This is the same regardless of whether your second mortgage is on the same property or a new one.
Collateral is where the differences between a second mortgage on the same property and a first mortgage on a second property become apparent. You need to have enough loan-to-value to support the loan. This depends on the lender's advance rate. For example, if the lender makes loans up to 80 percent of a property’s value, you can borrow $80,000 on a $100,000 property. If you have a first mortgage, you can borrow the difference between the lendable value and the balance of your first mortgage. If a lender goes up to 80 percent and you owe $50,000 on a $100,000 home, you can borrow an additional $30,000 before you reach the loan-to-value limit. If, however, if you have a second property worth $100,000 with no other mortgages on it, you can borrow $80,000 provided you meet the income and credit requirements.
The purpose of the property can dictate whether you qualify for a second mortgage. If the property is used as a second or vacation home, the same terms and conditions as a first mortgage apply. However, if the property is a rental, the bank will be more stringent. The repayment is predicated upon successful collection of rent. The lender will want to see a lease agreement and possibly look at the financial capacity of the tenant. Also, because an investment property poses a higher risk, the lender will have a lower loan-to-value limit, usually 70 to 75 percent. That means on a $100,000 investment property, you may be able to borrow $5,000 to $10,000 less than on a similar owner-occupied residence.
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