If you need extra cash or want to make renovations to your home a second mortgage may be a good option.
But, what is you have poor credit?
In this article we are going to go over some of your options for getting a second mortgage with bad credit.
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What is a Second Mortgage?
A second mortgage is when you use the equity in your home as collateral for a second home loan. Most allow you to borrow up to 80% of the value of your home. Second mortgage rates are usually much higher than a first mortgage. Many people get a 2nd mortgage to pay off debt, make repairs or renovations.
Getting a Second Mortgage with Bad Credit
Home equity loans and HELOC loans are difficult to qualify for with less than perfect credit. Many lenders will require at least a 680 credit score for a second mortgage. However, there are alternatives to home equity loans that will allow for lower credit scores.
The more equity you have the more willing the lender will be to help you. If you have your primary mortgage paid off its even better. The loan the loan to value (LTV) the less risky the loan is which will help compensate for bad credit. You will need to speak to a lender to see if you qualify.
Second Mortgage Requirements
- Current on mortgage payments
- No late payments in the past 12 months
- 680+ credit score
- 2 years verifiable income
Alternatives to a Second Mortgage
A cash out refinance differs from a second mortgage, instead of an additional loan on your home. Your loan and the cash is refinanced into one loan, with one loan payment. Typically a cash-out refi is easier to get approved for with bad credit because it’s less risky for the lender.
When you get a second mortgage the lender holds a second lien position on the home. Meaning if you default on the loan the primary lien holder gets paid and the second lender gets what left, if any.
If your credit is too poor to qualify for a second mortgage and you want to refinance into a low rate you can with a streamline refinance. If you have a Government loan, such as an FHA, VA, or USDA loan you can refinance into a lower rate and payment without a credit check or income verification.
The Home Affordable Refinance Program was created by the Obama Administration in 2009 to help people who were underwater on their mortgage be able to refinance into a lower rate.This is available for mortgage loans owned by Fannie Mae or Freddie Mae. You will need to hurry because this program is set to expire in September of 2017.
No Closing Cost Refinance
We’ve all heard of these no closing cost refinance and home equity loans. But you shouldn’t be fooled by this tricky advertising, there are hidden costs in no closing cost loans. All types of loans will come at cost. Usually it is in the form on higher interest rates. Instead of choosing to charge you upfront, the lender makes their money on the backend. Usually the extra interest costs outweigh the upfront savings..
Hard Money Second Home Equity Loan
If you find yourself in a dire need of cash and your credit is simply too low to get approved for a traditional second mortgage.You could look to hard money lenders to provide you will some quick cash using your home as collateral. The rates are often very high and the payments will be interest only.A hard money loan will be a last resort.
Improve Your Score Quickly Before Applying for a Second Mortgage
There are a few things you can do to increase your credit score in a hurry before you apply for a second mortgage. Making sure your score is as high as possible is the best way to maximize your odds of getting approved for a loan.
Tips to increase your score
- Pay off your credit card balances
- Remove or pay off collection accounts
- Get added as an authorized user
- Dispute negative accounts with the credit bureaus
- Do not apply for any new credit
Getting a second mortgage with bad credit is not a simple task. There are a few things you want to do to ensure you have the best chances of getting approved. First you need to make sure you have maximized your credit score. Pay down your credit card balances and try to get any collection accounts removed before applying.
Be aware you have alternative options if you cannot get approved for a second mortgage because of poor credit. Cash out refinancing is available with lower credit scores and at a lower rate than a home equity loan. Speak to a couple lenders to make sure you explore all of your refinancing options.
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Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.