The Difficulty for Approval for a Second Home Mortgage

Second mortgages provide extra cash to pay off higher-interest debts.

Second mortgages provide extra cash to pay off higher-interest debts.

Taking on a second home mortgage for extra cash to pay bills or applying for a new mortgage to buy a vacation home means opening up your personal finances to intense scrutiny, especially during tough economic times. Before signing a contract for additional mortgage debt, sit down with a licensed team of professionals, including a mortgage broker, financial adviser and real estate agent, to consider the potential hazards and the difficulties for the approval.

Employment

Lenders don't consider all employment equally. Mortgage lenders like to see full-time employment with one company over a long period, compared with a number of freelance or part-time jobs for numerous employers. If you frequently change jobs -- two years or less at each position with variations in earnings -- your application moves to the "difficult-to-approve" category, even when you move to a job in the same general employment field.

Current Debt

According to a 2010 article in the Washington Post, more than half the homeowners in financial trouble in 2010 had second mortgages. Taking on extra debt when you already have significant debt is a red flag for mortgage lenders. Home lenders move you into the "difficult" loan category if you have major debts for cars, motor homes or motorcycles. These aren't useful for collateral, even when paid for. The expenses make a lender wonder why you didn't use the money spent on toys instead of asking for another mortgage. If you make a significant income, but spend it quickly, it's another red flag for lenders. Borrowers with huge credit card debt and student loans need not apply, even if you're covering the payments.

Credit History

Your credit history has major weight for mortgage approvals. Large amounts of open credit, even if you owe nothing on the loans or credit cards, mean potential for spending sprees putting you in danger of not making your second loan payments. Any debts left unpaid or "sign-offs" in your past -- where the lender or collection agency allowed you to pay less than the original debt -- also reduce your chances of an approval. Talk to your mortgage rep, however, before closing accounts or paying off any debts. Lenders weigh financial accounts using a somewhat-mysterious system and you need a seasoned professional with a playbook to make the correct moves.

Home Value

The bottom line for most mortgage lenders is the value of your property, called the "loan-to-value" calculation. The secondary lender, called the junior lien, accepts the leftover amount from any foreclosure sale: the secondary lender is therefore less likely to lend on homes with little value. If your home with the first mortgage has equity, meaning that there's enough to pay the first loan and the second in the event of a foreclosure, there is a good chance you'll be approved for the junior loan. If you need the loan for a second home, the secondary lender may require you to attach the equity in your first home for collateral as a condition for the loan. That may sound like an acceptable scenario, but foreclosure in that situation means that you lose both houses.

About the Author

*I have written chapters and articles for Oxford and Harvard University Presses, ABC-CLIO, and others. Arcadia Press published two of my local history texts and I have also written for numerous "article sites," including Pagewise in 2002. My "How to become a...real estate agent" is available as an online text from a Canadian publisher. *I taught writing courses at a branch campus of Indiana University. *I held a California real estate license and have remodeled four of my own homes and advised others on financing homes, repairing credit to qualify for loans, and managing construction (including meeting local, state, and federal regulations for restoration and development grants). *I served as an AmeriCorps*VISTA volunteer and wrote nearly $75,000 in small education grants (under $1,000). *My travels include frequent road trips in Canada, Mexico, U.S., and Europe. I attended school at Cambridge University and used this as a base to explore the UK and Europe.

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