A second mortgage is a type of loan which is secured against the same assets as the first mortgage (e.g. your house) but which is based on the equity accumulated within the property. Though difficult to qualify for a mortgage with bad credit, second mortgages may be the answer for some borrowers looking to improve their credit scores while taking out a loan and making timely payments on that loan.
Applying for a second mortgage with damaged credit makes you a much greater risk, in turn increasing the price of obtaining a loan; essentially, the cost of borrowing always correlates with the risk which a borrower presents to a lender. As such, the lower your credit score is, the higher your available interest rates will be, and more than likely you will encounter stricter loan terms as well. Below you will find a list of lenders that can help with you securing your mortgage or repairing your credit:
In terms of interest rates, second mortgages almost universally include higher rates than first mortgages. As a borrower adds to his or her debt by taking out a second mortgage, he or she consequently becomes a larger liability to lenders who then charge more to compensate. In addition, since a second mortgage is classified as “subordinate” to the first loan, in the event of a default any money that a borrower can pay goes to the holder of the first mortgage. Only once this is paid in full can other lenders receive their dues.
Before applying for any kind of loan, always do a thorough examination of your credit report. Everyone is entitled to one free credit report per year, and retrieving an additional report only costs roughly $35-40. If you discover a mistake in your credit history, be sure to resolve the issue prior to sitting down with a lender; these small improvements to your credit could secure you much better rates when the time comes to commit to a loan.
If you have accumulated a large amount of debt through credit cards, try to pay off enough debt to where you owe less than 30% of the credit card’s debt limit. If feasible, pay off your credit cards entirely.
In addition, resist the temptation of resorting to quick credit fixes by moving debt to a lower-interest credit card. Doing so can negatively affect your ability to acquire a second mortgage with bad credit, as multiple credit applications will lower your credit score.
For borrowers who cannot afford the terms of a second mortgage with bad credit, consider co-signing the loan with a partner. A family member or close friend can sign the loan application with you, allowing a lender to use his or her credit score as the primary consideration. As a result, borrowers may qualify for loans with much fairer terms than alone with bad credit.
Stick with your original lender. For applicants with a low FICO score, you are much more likely to be denied a loan if the lender has no history with you. Conversely, dealing with a lender that is familiar with your circumstances will give you a much greater chance to receive an offer for a loan, since you have already proven yourself by successfully managing your primary mortgage. Your lender may even be excited by the opportunity to work with you again. If at all possible, seek a second mortgage from the lender who services your current mortgage.
Prove yourself. When applying for a loan with bruised credit, a borrower must demonstrate his or her own financial responsibility to prove reliability to a lender. Willingly disclose your financial situation to your lender with as much detail as you can. Show your lender that you are familiar with your own finances and can manage the additional monthly payments of a second mortgage. Acquire the necessary paperwork and other items necessary to make your case. If you can prove yourself to your lender, you will receive a loan offer.
Know what you’re getting into. It’s always important, and especially so with second mortgages, to know the terms of a loan before you sign any financial contract. Research and understand the loan that you are applying for, in terms of interest rates, closing costs, and other fees. If an unexpected cost startles you, your lender may lose faith in your knowledge and experience with loans, diminishing your chances of securing the loan. Although you should never hesitate to ask questions about fees and charges, it is important to show your lender that you know the essentials of the loan.
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