A second mortgage on your home can provide you funds for a variety of undertakings, such as home improvements. While the benefits are clear, maintaining two mortgages on a single property can be a risky venture that can put you too deep in debt. For this reason, lenders will carefully review your application to ensure that you qualify.
To qualify to take on a large debt such as a second home loan, you must first have a good history with your creditors. Your lender will examine your credit report. Credit scores range from 300 to 900. The higher your score, the better your credit, with more favorable rates available if you are in the mid-700s. If your score is below 620, the lender will see you as a credit risk and the chances your loan will be declined increase. Other adverse items, including late payments, collections, judgments and bankruptcy, work against you. If you know there is negative information on your credit report, give the lender a written explanation of the circumstances, such as job loss or medical issues, and explain how your situation has improved.
The lender will request financial information. Requirements vary, but typically include two years of W-2 forms and federal tax returns along with one month of pay stubs. The lender's underwriter will use this information to calculate your monthly income. Underwriters also add up the monthly payments listed on your credit reports, as well as the proposed payment for the second home loan. Dividing your debt by your income yields your debt-to-income ratio. To qualify, you typically need less than 40 percent of your monthly income going toward your debt.
You also have to have enough equity in your property to qualify for a second home loan. To determine equity, the lender uses an appraisal of your property. The lender will approve a loan up to a percentage of the appraised value, which varies depending on its guidelines. If your house is worth $200,000 and the lender goes up to 80 percent, you are eligible to borrow up to $160,000. Because this is a second lien against the same property, you will have to deduct the balance of your first mortgage, however. If you already owe $100,000, you can only borrow up to $60,000 more, assuming you meet the other qualifications. Some lenders will allow you to borrow more than 80 percent of the value of the property if you pay private mortgage insurance.
Though your credit, income and equity are the three most important factors in qualifying for a second home loan, there are other considerations. Past positive history with the lender, such as repayment of past loans, as well as level of deposits, can help if you're on the verge of approval. Depending on the lender, rates may be higher for a second home loan than for a first. Finally, expect closing costs, such as application and processing fees, in obtaining a second home loan.
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