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How to Get a Second Mortgage with Bad Credit


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TERMINOLOGY

Getting a second mortgage with bad credit can actually result in an improvement in your credit score. It is not easy to qualify for a second mortgage with bad credit, but it can be done. You first need to make your application as strong as possible by improving your credit score if you can. Second, shop for the best interest rate and terms you can get.

The Effect of Bad Credit

A second mortgage on your home almost always comes with a higher interest rate than a first mortgage. First, you are adding to your debt, which makes you a greater risk to the lender. Second, the second mortgage is subordinate to the first; therefore, if you default, the holder of the first mortgage is entitled to any money you can pay before any other lenders get paid back.

Applying for a second mortgage with bad credit makes you that much more of a risk. The cost of borrowing is always based on the risk you represent to the lender. The worse your credit, the higher the interest and the stricter the borrowing terms you will face.

Repair Credit Report Mistakes

The first step--even before applying for a second mortgage with bad credit--is to do what you can to improve your credit. Your credit history is maintained by the three main credit bureaus: Equifax, Experian and TransUnion. You are entitled to one free look yearly at your credit report, and additional reports are only $40. Check for mistakes, and if they exist, get the lender to tell the credit bureau to fix them. It is the only way to quickly affect your credit score.

Reduce Credit Card Debt

If you have substantial credit card debt, try to pay off an amount that brings you under 30 percent of your credit card debt limit. Pay off cards in full if you can.

Resist trying gimmicky fixes. Consolidating debt or moving credit card debt to a lower-interest card can actually hurt your chances of getting a second mortgage with bad credit. Multiple credit applications count against you and will lower your credit score.

Shop Lenders

Consider using a mortgage broker. The good news is that bad credit doesn’t mean you can’t get a loan. There is almost always someone willing to lend. You will just have to pay higher interest to borrow on a second mortgage with bad credit. A mortgage broker can shop many lenders to find the best rate you qualify for in your particular circumstances.

Get Help

If the terms for which you qualify on a second mortgage with bad credit are too expensive, consider lining up a co-signer on the loan. A friend or family member with good credit and with whom you have a good relationship can sign the loan application with you. His or her credit score will be the primary consideration.

By paying off the second mortgage, which often has a much shorter loan life, you can improve your credit history and enjoy the benefit of the equity out of your home. The key is to borrow only what you can afford and to stay current.