Factors That Influence Second Mortgage Equity Requirements
Over the years, second mortgages have become increasingly popular among homeowners, thanks to their low-interest rates and the option to use them for virtually any reason. Provided you have built enough equity in your property and meet the other eligibility requirements, you are almost sure that most lenders are willing to give you a loan.
Like the other loan products, the terms, rates, and loan requirements for second mortgages will always vary. In the sections below, we'll discuss the typical eligibility requirements and the factors influencing these second mortgage equity requirements. Call BMC Mortgage & Investments today to learn more.
Second Mortgage Equity Requirements
Before a lender approves your second mortgage, you must meet some predetermined minimum eligibility requirements. These requirements cushion lenders from loan defaults and other lending risks. And while the lending requirements will often vary, here are the most common:
- Minimum equity: lenders expect you to have a minimum percentage of equity in the property you want to use as collateral. Home equity is often expressed as a percentage, and most lenders require a minimum equity of 15 to 20%.
- Credit score: a good credit score between 650 and 700 is a requirement among most lenders. Some accept lower credit scores but may charge higher interest rates.
- Loan-to-value ratio (LTV): it's obtained by dividing outstanding mortgage debt by the property's appraised value. The maximum LTV for most second mortgage lenders is about 90%.
- Debt-to-income ratio (DTI): the ratio compares your monthly income to your monthly debt obligations. The higher the DTI, the higher the risk to the lender. Most lenders prefer anything below 45%.
Factors Influencing Second Mortgage Equity Requirements
The second mortgage loan requirements above are not necessarily fixed. That means a lender can slightly modify them based on your unique financial situation. For instance, the same lender may offer second mortgages to two borrowers at varying rates depending on each borrower's perceived risks. Here are the most common factors that lenders consider before imposing some minimum requirements on your second mortgage loan:
- Loan purpose: how you'll use the second mortgage often affects the lending requirements. For instance, a second mortgage used for home renovation may attract lower interest rates than one used to finance a speculative investment.
- Employment and income stability: Lenders prefer borrowers with a stable income source. If you can prove that your income is consistent, you are more likely to enjoy flexible loan terms.
- Loan history: your loan repayment history and creditworthiness will primarily affect how lenders view your loan application. You'll enjoy more relaxed loan requirements if you have a positive track record of repaying loans, even the smaller ones.
- Loan amount: higher loan amounts often result in stricter lending requirements. Every lending institution wants to ensure that you can repay the loan in time.
- Property type: the property you wish to use as collateral for the loan can impact the lending requirements. For instance, most lenders have different requirements for primary residences, investment properties, and second homes.
- Market conditions: as much as the lender would love to lower the rates or offer more favourable repayment terms, they are also limited by the current market conditions. The overall economic conditions typically influence the lender's risk assessment and criteria.
Every financial situation varies, and each lender has specific second mortgage equity requirements determining who gets what. Before choosing a lender to work with, you want to understand their eligibility requirements and the factors influencing such conditions.
To get the best deals possible, you want to work with a mortgage broker or financial professional to help you understand the factors that may influence your second mortgage equity requirements. The right broker can also help you compare the best lenders and negotiate the loan rates and terms on your behalf. Call BMC Mortgage & Investments today to discuss your options!