Taking Out a Third Mortgage- Is That Possible?

Taking Out a Third Mortgage- Is That Possible- 150x150Taking out a third mortgage is significantly more difficult than it was a few decades ago, when this type of mortgage was a lot more common. Third mortgages were given out without any strict requirements that are necessary to protect the lender, and that resulted in a housing crisis which caused many people to lose their homes. Nowadays, lenders are much more careful when giving out third mortgages, and most are actually choosing not to give out another mortgage to borrowers who are already in the process of paying back two mortgages.

Normally, when a borrower with multiple mortgage defaults, the first mortgage is prioritized over other mortgages, making a third mortgage a high risk for lenders. In case of a default, third mortgage lenders have to wait until the lenders for the first and second mortgage recover their money. Even if a lender agrees to give out a third mortgage, the interest rates on this mortgage will be much higher than the ones on your first mortgage and even the rates on your second mortgage.

These mortgages are based on collateral, so the higher the value of the collateral, the bigger the chance that the borrower will receive the third mortgage without much difficulty. If the borrower defaults, then the asset used as collateral, usually a home, will go into foreclosure, and the lender recovers part or all of his money.

What are Third Mortgages Used For?

While first and second mortgages usually pay for the home itself, third mortgages are usually taken out in order to make home improvements or repairs, which help increase the value of the property. They can be used to make additions to the home, such as a swimming pool or a garage, or to renovate the kitchen, the bathrooms or other areas of the home.

Securing a third mortgage is difficult and you must keep in mind that you will most likely have to make monthly mortgage payments on all three of your mortgages at the same time each month, and that the third mortgage will come with a much higher interest rate than the other two.

How to Get a Third Mortgage

Getting a third mortgage begins with shopping around for a lender willing to give you one. First, talk to your current lender, which may give you a good deal if you are a good borrower, with no missed or late payments on your first two mortgages. Even if your current lender agrees to give you a third mortgage, it never hurts to look around a bit more, because you could find an even better deal with a different lender. You will need to submit several documents, and your lender will verify everything, including your credit report. Besides documents such as your Social Security number and place of employment, you will need to submit documents that prove your income, such as a W-2 form and pay stubs.

You will have to pay for an appraisal in order to determine how much equity is in your home. The lender will decide how much you can borrow on a third mortgage based on the equity in your home. If everything is in order and the lender is satisfied with the equity in your home, they will grant you the third mortgage loan and you will have to pay the closing fees.

If you have a good financial situation and enough equity in your home, taking out a third mortgage shouldn’t be extremely difficult. But keep in mind that the lender will protect himself by having very strict lending requirements for such a loan, and probably give you a much higher interest rate.

Part 3: How to Procure Financing for Investment Properties

Part 3- How to Procure Financing for Investment Properties-150x150Question: Where can I get financing for residential real estate? I heard it’s easier to get financing for commercial real estate- is that true? Also, I would love some information on what variables affect a lender’s decision to give financing.

Answer: Many lenders are thought to prefer lending to commercial real estate investors rather than residential real estate investors. While that may be true, there are plenty of lender possibilities for residential real estate investment. In fact, here is a list of banks and lending institutions that provide loans for both commercial and residential real estate investment:

Lending Institutions for Real Estate Investment

  1. Wells Fargo
  2. PNC Real Estate
  3. MetLife
  4. Prudential Mortgage
  5. J.P. Morgan Chase & Co.
  6. Strategic Alliance Mortgage (SAM)
  7. KeyBank Real Estate Capital
  8. CBRE Group Inc.
  9. Northwestern Mutual
  10. Cornerstone Real Estate Advisers
  11. Berkadia
  12.  NorthMarq Capital
  13. CWCapital LLC
  14. Red Mortgage Capital LLC
  15. Walker & Dunlop
  16. Natixis Real Estate Capital LLC
  17. Pacific Life Insurance Co.
  18. Grandbridge Real Estate Capital
  19. Citi Community Capital
  20. Starwood Property Trust
  21. Beech Street Capital
  22. ING Investment Management
  23. M&T Realty Capital Corp.
  24. Principal Real Estate Investors

 What a Lender Looks for in a Borrower

Lenders seem to ask borrowers almost anything before considering them for a loan. The requirements are even tougher for first time borrowers. While some questions are predictable, lenders are becoming more inquisitive these days in order to minimize the risk of defaults. Lenders aggressively ask more questions so that they can provide reasonable proof to the underwriters that the borrower will actually manage to repay.

Except your family planning and health issues that are forbidden by the law, lenders want to know the following in a borrower:

  • Credit rating- a lender is first interested with your FICO or credit score. The score ranges between 350 and 850. The lender wants to know your outstanding debt in different types of accounts, the total outstanding debt and how well you’ve been paying your bills. Missed payments raise doubts with respect to risk of defaulting. Your credit history is very important to a lender and for this reason you should ensure that your credit report does not have any errors.
  • Debt income ratio- a lender wants to know the ratio of debt compared to your monthly income. The lender explicitly wants to know how much you have to spare each month after you’ve paid out all other debts excluding the mortgage. The debt income ratio disqualifies many people for a loan. You should therefore pay down many of your credit cards before applying for a loan.
  • LTV- this is the loan to value ratio which enables the lender to determine risk. LTV is determined by dividing the value of the home by the anticipated loan amount. In simple terms, it’s the amount of money a borrower is willing to pay for the house. The lower the amount put down by the borrower, the lower the level of doubt the lender will have about their creditworthiness.
  • Cash- lenders also love hard cash because it keeps them running the company. The lender will want to know how much a borrower has saved; this is not for purposes of down payment alone but also for meeting monthly mortgage repayments when they go into a financial stalemate.
  • Collateral- once the lender has assessed that your capacity and credit score meets expectations, collateral is the other most significant thing on the list. This is done by valuation of property by an independent appraiser in order to determine its current market value. The appraised value is used to determine the LTV.
  • Lawsuits- lenders are sensitive to risk, so they have to check out every possibility on your end that can make giving you a loan a bad idea. A lender will want to know whether you are the plaintiff or defendant in any lawsuit because if judgment goes against the borrower, then it will impact their financial position negatively.
  • Divorce- the number of divorces in the United States is on the rise. Lenders want to know the financial details in a borrower’s divorce because a borrower may be responsible for their ex-spouse’s debt. If a borrower includes alimony or child support as a source of income in their loan application, the lender will also want proof of such income.
  • Ethnicity- the Department of Housing and Urban Development (HUD) requires lenders to inquire about the borrower’s race for purposes of statistics. To avoid discrimination of an applicant, no further ethnic inquiries can be made. HUD also checks lender records routinely in order to ensure that they are not turning down applications from minorities or exploiting them by charging them unusually high fees.

This concludes the three part Q&A on procuring financing for investment properties. If you have other questions, send them our way and we’ll do our best to get answers to you shortly!