If you need extra cash or want to make renovations to your home, a second mortgage may be a good option.
But, what if you have poor credit?
This article will look at second mortgage requirements, how to get one with bad credit, and the alternatives.
Refinance Rates (December 2020)
What is a Second Mortgage?
A second mortgage is when you use the equity in your home as collateral for a second home loan. They let you 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 second 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, it’s even better. The lower your loan-to-value ratio (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 are 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. If you default on the loan, the primary lien holder gets paid, and the second lender gets what is 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.
A HECM loan is a type of reverse mortgage homeowners who are 62 years of age or older can get to provide a stream of income using their home’s equity as collateral.
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 a cost. Usually, it is in the form of 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.
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. Ensuring 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. You want to do a few things 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 of lenders to make sure you explore all of your refinancing options.
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