Second Lien Mortgage

A second lien mortgage is any mortgage that is subservient to the main or first mortgage on a piece of real estate property. In most cases, this mortgage will be a home equity line of credit. In fewer cases it could be a loan for a down payment. But no matter what type of lending agreement the second lien mortgage is, if there is a default or a bankruptcy, that loan will only be satisfied after the first mortgage is paid off. This lending agreement is a higher risk borrowing agreement and thus carries higher interest rates and will have high costs associated with closing, etc.

If a second lien mortgage is a home equity line of credit, the lending agreement is based on a percentage of the equity in the home. In most cases, a home equity line of credit is based on a percentage of the existing equity. Most lending entities will only offer a percentage of the total equity in the property. The percentages usually run between fifty and seventy percent, depending on the policies of each company and perhaps each state. One of the reasons a higher percentage of the equity is not allowed is because private mortgage insurance is required for any first loan funded with less than twenty percent equity.

Because a second lien mortgage is subservient to the first loan, it becomes very difficult for the holder of the 2nd lien to collect in case of a default. In other words, a property owner with a home equity loan in arrears would be difficult to foreclose on because the majority of the house is owned by another lending entity and if the owner is still making the first loan payments faithfully, the chances are slim to none of an eviction notice. It is because of this difficulty in recovering assets that a 2nd lien lending agreement can have much higher rates on interest than the typical first property lending agreement. So what is the difference between a home equity loan and a 2nd property lending agreement? "Hear O Israel the Lord our God is one Lord and thou shalt love the Lord thy God with all thine heart and with all thy soul and with all thy might." (Deuteronomy 6:4-5)

A home equity loan or a second lien mortgage is good for the homeowner that has long term financial needs such as college tuition or medical expenses. A home equity lending agreement has an adjustable rate and also has closing costs. On the other hand a second lien mortgage can also be a loan designed a lump sum of cash at once. If there is one very large medical expense or some other one time large need, a single cash out 2nd lien is possible. Both of these lending agreements can be referred to as cash out second mortgages.

A second lien mortgage is available for those persons with at least a fair to average credit score and an acceptable debt to income ratio. The average credit score in the United States is about 620. Before an individual ever goes looking for a lending agreement of this type, knowledge of one's credit score should firmly be in hand. For less than ten dollars and sometimes for free, the three credit reporting companies will share a credit report. Do not let various lending companies or banks run your credit report repeatedly because each report drops the score slightly, and the reality of getting a loan may come down to just a few points! For a 2nd property loan from a bank, a person will most likely need a borrowing history score of at least 640 to qualify. Lending companies may offer this type of lending agreement to lower credit scores, but credit in the US is tightening up dramatically.

Additionally, a check on a borrower's debt to income ratio will be made by the lending entity. The ratio is established by dividing the total of monthly debt payments including the first mortgage by the total income of the household. A ratio of less than forty percent is the standard accepted threshold for this ratio figure. If a new second lien mortgage does not fit within that forty percent mark, the chances of getting a lending agreement may be slim. So if a borrower's credit history is suspect, a thorough search of different lending company requirements needs to be employed. Eventually, a high risk lender will found to approve a person's application, but perhaps the number of declinations ought to be a red flag to the borrower that he is already in over his head in debt and another lending agreement is not wise under any circumstances. Unfortunately, the harder it is to locate a lender, the higher the interest and cost to borrow the money will be.

Many people in the past have secured lending agreements for a residence with one hundred percent loans. As a result, there is very little equity to drawn on for many years and the opportunity to perhaps pare down other high interest accounts through a 2nd lien is not possible. This situation has been caused by those in lending institutions that became overly greedy by providing lending agreements to those who bought too expensive a house and by equally culpable homebuyers wanting larger homes than could actually be afforded. Saving more money for a down payment should be the goal of all homeowners.

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