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.
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.
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.
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.
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.
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- Washington Post: Second Mortgages Complicate Efforts to Help Homeowners
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- FHA.com: FHA Requirements -- Debt Ratios
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