Unlike other assets you borrow money to buy, a home has a title that must start off clean. For example, when you owe money on a previous home that you failed to pay off, the lender takes the home back; whereas a car dealer may allow you to roll the unpaid amount from a trade-in vehicle into new financing. A previous mortgage debt and a new home loan are exclusive of one another and can't be combined.
Lenders make loans to creditworthy borrowers, who they pre-screen for derogatory credit and active mortgage loans. To get a new mortgage, the lender calculates the sum of your debts and compares it to your current income. It also reviews your credit report for recent late and missed payments on credit and mortgage accounts. When you buy a new house, the lender determines whether you have old or current mortgage debts and if you can afford a new loan in spite of them. It never allows you to attach old mortgage debt to a new house.
A home acts as collateral for a mortgage loan. The lender secures repayment for the loan by attaching a lien to the property's title for the unpaid balance. A mortgage lien remains attached to the home until repaid through the refinance or sale of the house. A lender may exercise its right to take the home back through foreclosure to recoup money if you default on payments. A mortgage debt is cancelled by foreclosure and doesn't follow the borrower to a new property.
An unpaid balance on a previously foreclosed or otherwise settled mortgage account can turn into a deficiency judgment. A mortgage lender will likely reject your application for a new loan until you repay the judgment because it can become a lien against the new property. Mortgage lenders make loans on properties with clear titles and expect them to remain clean for the foreseeable future. A previous lender may require you to sign a promissory note to recoup losses after you defaulted on a mortgage loan. A new lender views a promissory note on your credit as a red flag and may require you to pay it off before making a loan on a new house.
Rolling previous debts into a new mortgage by way of a cash-out refinance diminishes equity in your new home. In general, lenders require you to own the home for at least 12 months before allowing you to tap into its equity through a cash-out refinance. They are also conservative in the amount they let you borrow. You must have substantial equity in your home to pay off the existing mortgage, previous mortgage debts or liens, or transaction closing costs, plus maintain sufficient equity in the property -- usually 15 to 20 percent.
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