Multiple home loans can provide multiple benefits. A mortgage lets you purchase a home. A home equity loan provides financial flexibility for debt consolidation, home improvement or a big ticket purchase. A line of credit doesn't need to be used right away, but can provide peace of mind on a rainy day. If you have enough income and equity, you can take two home loans.
TL;DR (Too Long; Didn't Read)
Individuals may have multiple home loans as long as they qualify for the loans, which include factors such as credit scores, loan-to value guidelines and debt-to-income requirements.
Credit Score Determines Loan Qualifying
If your credit is poor, you will have enough trouble getting one home loan, let alone two. An Ellie Mae study shows that the average FICO score for a closed home loan in May 2019 was 728. Even if your credit is stellar and your spouse's is less than so, you'll still have a hard time getting approved.
To give yourself the best chance of getting two home loans, make sure your credit is in tip-top shape. Lenders will overlook minor blemishes, especially if they are in the distant past, but you want your credit to be as clean and strong as possible.
Debt-to-Income Ratio for Housing
To qualify for two home loans, you must prove to your lenders that you can shoulder both payments while also handling your other debts. The underwriter determines your ability to do this by calculating your debt-to-income ratio (DTI). On a primary conventional mortgage, your front-end DTI must be no higher than 28, and your back-end DTI must be no higher than 36.
This means that no more than 28 percent of your income goes to housing expenses, such as mortgage payment, taxes and insurance, and no more than 36 percent goes toward your overall debt. On home equity loans and home equity lines of credit, this ratio is typically 40 percent, but includes your first loan payment, your new loan payment and the remainder of your debt.
Loan-to-Value Mortgage Guidelines
An important factor in carrying two loans is your equity as determined by your loan-to-value ratio (LTV). For example, if your house is worth $300,000 with a first mortgage of $200,000, the LTV is 67 percent. Now say that you want a home equity as your second home loan. The lender you've chosen allows a maximum of 80 percent LTV, and 80 percent of $300,000 is $240,000.
Deduct your first mortgage, and you're left with $40,000 as the maximum you can get on a second home loan. If you're already at 80 percent LTV, you'll have to find a lender willing to lend to a higher value to carry two home loans.
Lien Position Affects Mortgage Approval
One thing that you may not consider -- but is very important to the lender -- is lien position. A lender approves a loan based on the idea that the lien it files will be in a specific position. A purchase mortgage is approved with the idea that it will be first position while equity loans are often second position. Often, this process happens organically since you can't purchase the house without a mortgage, and you can't get an equity until you purchase the house.
But if you refinance your first mortgage, the new loan will go into second position behind the equity, making it difficult to follow through with a refinance without subordinating or refinancing the equity as well. This is something to consider when carrying two home loans.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.