Getting a second mortgage is not as easy as getting your first one. Your options may be limited. You may not be in a position to negotiate for a better rate unless you are doing really well financially.
Finding a lender to lend you a second mortgage can be tough. Although a few might get in touch with you through mortgage leads, there is no guarantee that they will actually approve your second mortgage application. Any lender may want to evaluate your personal as well as your financial situation thoroughly before agreeing to offer you the loan.
Not everyone may qualify for a second mortgage. Nevertheless, as a borrower, it is important to understand what lenders look for, before approving a second mortgage application.
Your home should have accumulated considerable amount of equity
Equity is one of the first things a lender might look for, before approving a second mortgage application. Remember, you already have a loan on the house. So, unless the value of your home exceeds the amount that you owe, you may not even be considered for a second mortgage.
The excess amount of equity (determined by deducting the balance left on your primary mortgage by the value of your home) should be enough to cover at least six months of mortgage payments on both your properties. If it does, your lender will be assured of you being able to make your mortgage payments even if you happen to lose your job.
Your Debt-To-Income Ratio should be low
Debt-to-income ratio is something that will tell your lender that you will be able to make your monthly payments even after managing your other monthly expenses. The standards for debt-to-income ratio might vary from one lender to the other. It may not even be the same as what it was for your first mortgage. You need to figure it all out before applying for your second mortgage.
The best thing to do would be to improve your income or reduce your monthly expenses. You can take up a second job or start a side business to add up to your income. Alternatively you can rent out your second home without increasing your expenses. This way your debt-to-income ratio will not go high. The extra income that you earn would be sufficient to help you make the additional monthly mortgage payment.
You will have to maintain your Credit Score
There is a minimum credit score that every lender considers before approving a mortgage application. The credit score that would be considered for a second mortgage would usually be higher than what is considered during the first mortgage.
Credit score is determined based on how regular you are in making your monthly mortgage payments and other debts. If you have not been too regular or have missed out on one or two payments, it is better you delay your application. Regular payments for at least one year will be mandatory to enjoy a decent credit score.
It is always better to get your credit report before applying for your second mortgage. This is available for free from one of the three nationwide credit bureaus. Once you have checked this report for accuracy, you can start taking steps to improve your credit score. To do this, you may have to restrict the usage of your credit card, pay your bills on time and be regular in your monthly payments. If you are thinking of going for a car loan or a personal loan, it is better you delay it until you get your second mortgage.
Make sure you have a good employment History
Employment history is something a lender would want to consider before approving your second mortgage. While your current job and the salary you are earning play a major role in determining your eligibility, your previous employment records are also equally important. There should not be too long gaps between employments. You should have worked for your current employer for at least two years now. You shouldn’t have changed too many jobs within short periods of time. Your current income should be adequate enough to support both your mortgage payments apart from your monthly expenses and other debts. This will give the lender the assurance that you will be able to make your monthly payments no matter what.
Once you know you qualify for a second mortgage, it becomes easier to choose a lender from the ones that contact you through mortgage leads.