What is a second mortgage?
A second mortgage is a loan a borrower takes on a home that people live in, whether it is a primary residence, a vacation home or a rental property. It is called a second mortgage because the home already has a lien on it. These mortgages will be limited to a maximum combined loan-to-value (CLTV).
How does a second mortgage work?
These mortgages can be risky for second mortgage lenders due to the fact that they are not the only creditor on the property. As a result, borrowers are subject to higher 2nd mortgage rates and shorter repayment terms than the standard 30-year mortgage.
There are many reasons to get a 2nd mortgage loan, including to pay for an emergency, such as bail, a divorce settlement or uninsured property damage. Other times, one is taken for long-planned home improvements or used to pay for education expenses. This page will explore the various uses and loan types that comprise the residential 2nd lien mortgage family.
What are common types of second mortgage loans?
- Cash-out second mortgage – This mortgage converts the equity in the property (the difference between its value and any mortgage balance) into cash. It is repaid over time, like the first mortgage, but is subject to its own set of financing terms. This is also known as a stand-alone second.
- Piggyback second – This kind of mortgage takes 2nd position at the same time as the first mortgage in a purchase scenario. It is used to minimize the down payment needed, while eliminating the first mortgage insurance requirement. This mortgage can be provided by the same lender as the first, or if the first mortgage lender allows it, a different lender can write the second mortgage.
- HELOC, also known as a home equity line of credit – This is not strictly a loan, but most people think of it as a home equity loan. As the borrower draws on the line, he/she pays interest only for a period of time, often ten years. Then, principal and interest payments begin until the line is repaid.
- Hard money 2nd mortgage – This is a cash-out second mortgage provided by a hard money lender. Second mortgage rates for hard money are typically high, but these loans close more quickly than a conventional second mortgage loan.
What are common purposes for taking a second mortgage?
- To get cash to use for the down payment on a different residence
- To get cash to pay off the first mortgage when it is being foreclosed
- To pay for rehab and remodeling of the residence and get tax-deductible interest payments
- To supplement the down payment on a residence, so that the first mortgage is 80% or less LTV, resulting in no need for mortgage insurance
- To purchase cars, boats, RVs, etc…
- To pay off credit card and other high interest debt with a low interest HELOC
- To pay for education
- To pay for emergency expenses
Are there second mortgage loans for people that don’t fit bank or credit union credit guidelines?
Yes. Due to regulation of residential mortgages, some borrowers fall outside the standard guidelines. People who are often affected are: self-employed, independent contractors or have 5 or more mortgages already, low credit scores, high monthly debt compared to monthly income or no credit history in the US because they are foreign citizens.
What about hard money second mortgage loans?
A hard money second mortgage loan can be a convenient option for borrowers that need a loan quickly, don’t qualify for a conventional loan or are unable to provide full documentation. Generally, as long as the combined loan-to-value stays below 70%, there is cash to be taken out of the equity in the property. Borrowers facing foreclosure because of a defaulted first mortgage could use a hard money second mortgage cash-out to rescue the home by paying off the first mortgage. Borrowers with a business often take a “business purpose” second mortgage to inject cash into the business. In this case, the “business purpose” loan’s interest may be tax deductible, making this type of loan attractive in the right circumstances. Underwriting for hard money loans is abbreviated, allowing borrowers to get the cash they need quickly.
How to find a wholesale second mortgage
Banks, non-banks and private lenders all offer second mortgage loans but first you must determine the borrower’s credit profile and the exact loan specifications to figure out which one best fits their need. Use Lender Search to identify which of the 150+/- wholesale prime lenders in Scotsman Guide can fund your loan.
For credit-worthy borrowers and/or loan amounts that fall outside of Prime guidelines, use Lender Search to find Non-QM options. For example, 550 minimum FICO, owner-occupied SFR, $30K-$250K, 15-year amortization.
For business purpose and hard money second mortgages, you may also use Lender Search. Examples of these types of loans would be stated business purpose, owner-occupied or rental, 65% CLTV, funding in 5 days.