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.

Foreclosure with Property Liens and Second Mortgages- Find Out What Happens!

Foreclosure with Property Liens and Second Mortgages-Find Out What Happens- 150x150Many home owners need a second or even a third mortgage in order to cover the price of their home or for repairs and additions. Second mortgages are usually taken out to cover the high price of the home when a single mortgage just doesn’t cut it. Other types of loans, like a home equity loan, are generally taken out when the home needs repairs or if the owner wants to make an addition to the property, like a garage or a pool.

Home owners can also have liens on their properties. When you are sued, for example by a credit card company, for a sum of money and you lose the battle in court, the winning party can file a judgment lien, which will be attached to your property. This article will describe what happens to second mortgages and liens if your home goes into foreclosure.

What is a Second Mortgage and a Lien?

Second mortgages are pretty much just like any other mortgage loan, but they have some advantages and disadvantages of their own. Typically, borrowers will take out a second mortgage in the form of a home equity loan by tapping into home equity. This type of loan is actually a line of credit which is used much like a credit card. The borrower withdraws the amount that he or she needs, which will have to be paid back with interest. Home equity loans are usually used by home owners who wish to make repairs or improvements to their homes.

A lien is created and attached to your property when you lose a lawsuit that involves a sum of money. The property lien gives the creditor the right to repossess your assets in order to satisfy your debt. A judgment lien will prevent you from selling your property until it is removed.

The priority of a lien is determined by the date when it was recorded. Usually, first mortgages are considered first lien, second mortgages are considered second lien, and judgment liens come in third position.

What Happens After Foreclosure?

When a home is foreclosed on, it is important to know who gets paid first. Normally, first mortgages get paid off first after foreclosure. After the foreclosing lender receives his money, the remaining funds will be used to pay off second mortgages and any liens on the property. If the property doesn’t sell for more than what the mortgage loan is worth, then the foreclosing lender gets all the money, and any second mortgages or liens will be wiped out, but the debt won’t be eliminated.

A common mistake that many people make is thinking that second mortgages or liens are paid off once the property is foreclosed on, even if the selling price wasn’t high enough to satisfy these debts. After a foreclosure, the second mortgage and liens are removed from the property title, but the previous owner will still have to pay his or her debt.

The lender that granted you the second mortgage can sue you in order to try to recover his money. However, this will only happen if the debt wasn’t paid off after the foreclosure. Unfortunately, lenders for second mortgages usually don’t receive enough to satisfy your debt after foreclosure, so there is a strong chance that they will sue you. Liens have also been wiped out, but the creditor will still go after you in order to recover the money. Liens that were previously attached to the foreclosed property can still be attached to other real estate property that you own or will own in the future.

Having a second mortgage or lien can create problems even after foreclosure, if they are not paid off. So your best choice is to make sure that you protect yourself by doing some research beforehand, so you will know what to expect if your home is in danger of being foreclosed and you have a second mortgage and liens on it.

Need a Second Mortgage? A Home Equity Line of Credit Could Be the Answer!

Need a Second Mortgage-A Home Equity Line of Credit Could Be the Answer-150x150Similar to a credit card, a home equity line of credit could be the answer for home owners who are looking to take out a second mortgage. A home equity line of credit has several unique features and more flexibility than regular home loans, so it might be a better choice for those who need a second mortgage.

What is a Home Equity Line of Credit?

A home equity line of credit (HELOC) gives home owners the possibility of borrowing against the equity in their home. The borrower doesn’t receive the whole loan amount upfront. The lender will establish a line of credit from which the borrower can withdraw, up to the agreed total amount, much like when using a credit card.

The loan is given out based on the borrower’s credit score and equity available in his home. Home equity lines of credit, which are different than home equity loans, usually last for 5 to 10 years in which you can withdraw the amount that you need, for which you will be charged interest. Interest will not be charged for the whole credit line available, but only for the amount that you are actually borrowing. The period in which you can use the money is called a draw period, and it is followed by the repayment period. Repayment periods usually last 10 to 20 years, but some home equity lines of credit require payment at the end of the draw period.

Because a home equity line of credit allows you to withdraw as much as you want, within the set limit, the interest on this type of loan will be calculated daily, rather than monthly.

Benefits of a Home Equity Line of Credit

HELOCs have several strong advantages which should make this type of home loan a good choice for your second mortgage. Here are the most notable:

  • You will be charged interest only on the amount of money that you use, and not the whole credit line amount. The interest, which is tax deductible, will also be lower initially than it would be on a regular mortgage loan. There are, however, a few fees associated with setting up the loan and keeping the line of credit open.
  • Applying for a HELOC is a very simple process and the fees are much lower than on a conventional mortgage loan.
  • Withdrawing funds from a HELOC is as easy as using your own bank account. You can just use the money through a debit card or by writing checks.
  • Home equity lines of credit are also a good option for home owners who wish to make repairs or start a home improvement project, pay for education or medical expenses.

Drawbacks of a Home Equity Line of Credit

Home equity lines of credit are not the perfect loan, so they do have some disadvantages, as well. Here are the ones that you should keep in mind:

  • HELOCs are riskier than adjustable-rate mortgages, meaning that the interest rate can significantly increase over night. Interest rates change during the draw period, unlike ARMs, which give you a fixed rate for at least 5 years.
  • Paying a low interest in the beginning can be a trap for those who don’t have a good budget plan. The interest might be much higher when the time comes to pay off the principle.

As long as you are disciplined, understand what a home equity line of credit involves, and what are its advantages and disadvantages, this type of loan might be a great choice when you need a second mortgage.

Financing for Investment Properties

Q&A- Financing for Investment Properties- 150x150Question: I work in a second home/vacation home market, and a lot of my customers have a hard time getting financed, even if they have very strong credit and assets. Some of my most common questions/roadblocks:

1. Does it really matter if it is a house or a condo? Why?

2. Why do I have to make such a big down payment? I only had to pay 20% down on my home in (some other state).

3. What’s the difference between an investment property and a second home? What differences should I expect for each?

4. How will my insurance requirements be different for a vacation/second home vs. primary residence?

[Compare the latest mortgage rates from dozens of lenders, updated daily.]

Understanding Finances for a Second Home

Answer:  1. Many lenders have watertight requirements on second mortgage applicants. It matters more specifically how the house or condo is used, where it is located in relation to the primary residence, and a few other factors. These are some of the requirements that need to be met:

(a)  Location from the borrower’s principal residence. It is required that there is a reasonable distance between the location of the second home and the principal home. If the second home is located on a beach that is less than an hour’s drive away, then you will be granted a second mortgage. However, if it is further inland, then the primary home must be located more than one hour’s drive away from the second/vacation home. The general distance accepted is at least 50 miles away.

(b)  Must be occupied for some portion of the year. Lenders require that the second home be occupied for some portion of the year. Depending on the location of the home, this can be done seasonally or several times during the year. For properties located in a ski or beach area this can be seasonal. If it’s a lake house then you should make several visits there. The property must remain suitable for occupancy at any time during the year.

(c)  Only one-unit properties can be financed. For purposes of a second home, only a one-unit property can qualify. Duplexes or multi-unit properties are considered to be investments by lenders. A condo is one of the houses that can qualify for a second mortgage.

(d)  The property must not be rented out. Being your home, the lender is strict to ensure that you don’t rent it out or subject the property to a timeshare arrangement. The borrower must have exclusive control over the property. Agreements with property management firms to take control of the property are also not allowed.

2. There are several options for purchasing a second home, which typically includes a larger down payment than with a primary home. These include:

(a)  Cash. According to the National Association of Realtors, 36 percent of all home buyers in 2010 paid for their houses in cash. This is the best option, but the majority of people are unable to save enough money to purchase a home in cash.

(b)  Conventional loan. This is the most common option that many borrowers tend to choose. Borrowers must be prepared to make a larger down payment (more than the usual 20 percent for the primary mortgage) for the loan to be processed. You will also pay higher interest rates and meet other tighter requirements compared to those of a primary mortgage. For a second home guaranteed by Freddie Mac or Fannie Mae, the down payment is 20 percent. However, the rate is higher for individual lenders, usually 30 or 35 percent. This rate is higher because lenders argue that a borrower has two loans and the risk of defaulting is high.

(c)  Home equity loan. If a homeowner has substantial equity in their home, this becomes the best option. It’s only unfortunate that many homeowners have lost equity in their homes because the value of homes has dropped drastically in the market during recent years. Additionally, many lenders fear that if a homeowner bumps into financial difficulties then they will prefer to clear their primary mortgages in preference to second home mortgages.

3. Many people tend to use the terms “second home” and “investment property” interchangeably in an attempt to describe property that does not qualify as a primary residence. However, there are a number of differences between an investment property and a second home.

Investment Property

Investment property can be defined as property that is purchased or acquired for purposes of generating income, taking advantage of particular tax benefits, or enjoying profit from appreciation. If you purchase property that will be used to make some gains instead of being your residence, then it is legally defined as investment property. It must not be your primary residence.

Different types of investment property include commercial property, residential rental property, and property purchased with an intention to resell.

In comparison with primary and second homes, loans for investment property are charged a higher interest rate. A larger down payment must also be made.

Second Home

A second home is defined as property that becomes your residence in addition to the primary residence you have already. In simpler terms, it is a vacation home that you visit occasionally.

Several conditions must be met if a property is to be allotted the name ‘second home’. They are referred to as the Second Home Rider. The conditions include:

  • Property must always be kept available for owner’s exclusive use and enjoyment whenever they wish
  • Borrower is the only occupant of the property, being the secondary residence
  • Property cannot be subjected to any agreements that need the owner to rent it or pass the rights to a property management firm
  • Property should never be subject to a rental pool or timesharing arrangement

A second home mortgage usually has a lower interest rate than an investment property loan. The down payment is also lower especially if it is approved by Fannie Mae or Freddie Mac.

4. There are different insurance recommendations for second homes for a variety of reasons.

Insurance protects your home from storm damage, lightning, burglary, fire, vandalism and other perils. It may also include some minor cover for risks from accidents such as a dog bite, a slip-and-fall accident, or an injury as a result of an accident on the property itself.

Depending on the location and the weather conditions in the area where your second home is located, getting an insurance cover can be difficult. For instance, you will need to get a flood insurance cover for your second home because it is not covered in the standard insurance policy for a second home. If the home is located in a forested area, then installing a fire-prevention system will reduce the overall cost. Earthquake insurance is usually not covered and you will have to purchase this independently.

Second home insurance is generally higher than primary home insurance because it is more susceptible to burglars as a result of your absence many times during the year. Damages caused by storms may also be common because you are not always around to fix the house. Taking steps to keep your second home secured and maintained can save you more than 20 percent of the insurance cover.

The following tips can help you to keep the insurance cost lower:

  • Taking a nonsmoking discount if you are not a smoker (reduces risk of a fire) or a loyal customer discount
  • Taking discounts for an up-to-date second home that is fitted with the latest electrical systems, plumbing and the overall structure
  • Taking safety discounts for a second home with a security system, especially with an independent security agency
  • Taking a multi-policy discount for a homeowner that bundles their home and car insurance with one insurer

If you are buying a condo, the condo association will provide the insurance cover.

Keeping a watchful eye on your home by appointing a caretaker may help to convince the insurer that you are responsible. This may lower the cost of insurance.