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4 Common Second Mortgage Financing Problems


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TERMINOLOGY

There are many potential second mortgage financing problems that you could run into when trying to buy a second home. The process of purchasing a second home is not like the typical process that you deal with on a primary residence. Here are a few common second mortgage financing problems that many people run into.

1. Credit Problems

When you are trying to obtain a second mortgage, the lender is going to scrutinize everything in your credit history. It is going to pull your credit file and look at every account that you have had for the last several years. The lender is also going to look at your credit score to determine if it is sufficient to provide you with a loan. In many cases, you will need to have a higher credit score for a second mortgage than you would for a primary mortgage. Many people, because they qualified for a first mortgage, believe that they can qualify for a second one when, in reality, their credit score is not high enough.

2. Liquid Reserves

Another problem that many home buyers run into is that they do not have enough liquid assets in reserves to suit the lender. Many lenders will require you to have a substantial amount of cash or other assets on hand before considering you for a second mortgage. This is typically not required with a primary residence, but lenders are much stricter with a second mortgage. In some cases, you may have to have enough money to cover six months' worth of mortgage payments on your primary and secondary residences. This requirement eliminates many potential home buyers.

3. Debt-to-Income Ratio

Many potential borrowers also run into trouble when it comes to the debt-to-income ratio. In order to come up with this number, the lender is going to add up the total of your debt payments on a monthly basis. It will also add up all the sources of income that you have every month. It will then compare your total debt payments to your total income to come up with a ratio. If your debt-to-income ratio is too high, the lender will not be able to extend a loan offer to you. Each lender is going to have its own criteria when it comes to debt-to-income ratio. Just know that when you are trying to get a second mortgage, lenders are going to be much stricter about this.

4. Down Payment

In order to qualify for a second mortgage, you will most likely have to come up with a substantial down payment. The exact percentage that you will have to come up with will vary from one lender to the next. However, you should expect to come up with something for this type of loan. Many people go into this process without much money for a down payment and end up disappointed.