Borrowers can use a second mortgage to achieve their financial goals.
Much like their other loans, hard money lenders offer an easier and more flexible way to obtain this loan.
Second mortgages also differ from refinances and other ways of leveraging your equity.
Let’s break down what a second mortgage is and 8 things to know about them, so you can make the best financial decision for yourself.
What is a second mortgage?
A second mortgage is a loan taken out against the borrower’s property.
When you secure your first mortgage loan, the value is based on your finances and what you can afford. A second mortgage loan amount is determined based on the value, or the equity, you have in the property.
With a traditional loan, a second mortgage records a security instrument or lien on the home for the amount borrowed. The security instrument is a deed of trust or mortgage that is connected with a promissory note with payment terms.
In the case of a hard money lender, second mortgages work with that same concept but in a simpler way.
The borrower puts their property on the line as collateral. The borrower can then take out a loan based on the value of the property.
Let’s look at 8 things you might not know about second mortgages and getting one through a hard money lender.
1. Second mortgages based on LTV
LTV stands for Loan-to-Value ratio. With second mortgages, lenders look at the CLTV or Combined Loan To Value. Combined loan to value is the ratio that comes from dividing the 1st and 2nd loans into the value of the property used as collateral. Hard money lenders want to know that the property is worth something.
Much like the first time you’re approved for a hard money loan, the private lender focuses less on your financial situation unless the loan is a consumer purpose loan on a primary residence. A hard money lender will look at your credit score, but it’s not as much of a factor as the value of the property you’re using as collateral for a loan.
The same goes for things like employment verification, Debt-to-Income ratio, and other things a bank might ask for. A hard money lender will also take your working relationship into account. If they’ve lent to you before and you’re still in good standing, there’s a good chance they’ll work with you again.
2. Loan funds can be used for anything
Unlike your first mortgage, funds from a second mortgage can be used to fund big purchases, renovations, pay off debts, provide working capital for a business, help you consolidate other debts, or whatever you need them for.
You could even use the funds to purchase a second investment property.
What’s your loan scenario?
Other loans, such as student loans or auto loans, are designated for specific things. But a second mortgage doesn’t have guidelines that dictate what the loan is used for.
3. A second mortgage differs from refinancing
When you refinance your first mortgage, you lower your interest rate and monthly payment, meaning you still only have one mortgage payment. Taking a second mortgage means taking on an additional loan payment each month.
Your second mortgage may come with a higher interest rate. In the event of a foreclosure on your property, the lender of the initial mortgage will get paid first. The lender of a second mortgage may not get paid at all, making it a riskier deal for the investor.
Hard money loans already have higher interest rates than conventional loans. If your first mortgage is through a bank and your second is through a private lender, that lender may decide to set an even higher rate to cover their added risk.
Additionally, if you fail to qualify for a home refinance on your mortgage, a second mortgage from a hard money lender is easier to secure.
4. Interest is tax-deductible
The interest you pay on your second mortgage can be deducted from your taxes in certain scenarios.
If you’re using the funds from a second mortgage to pay for renovations on the property you’re leveraging, interest can be deducted from your federal taxes.
This can come in handy if you’re improving the property with the intent to sell it. More of the profit from the property’s sale can go toward paying down the principle of the mortgages.
5. Hard money second mortgages can improve your credit
If you use a traditional Home Equity Line of Credit (HELOC) to pay off debts, your debt will remain the same and your credit score won’t change.
A hard money loan for a second mortgage, however, won’t appear on your credit report. If you leverage property for a second mortgage of $100,000 using a private money lender, you can use that loan to pay off $100,000 worth of debts. The overall debt amount on your credit report will appear lower, which will likely boost your credit score.
6. Second mortgages for business purposes
Borrowers can get a non-owner-occupied or owner-occupied second mortgage for the purpose of using it for business costs.
Since there are no requirements for how borrowers must spend the funds, second mortgages can be used however you need them.
Both conventional lenders and hard money lenders allow borrowers to leverage their property for business.
Benefit from a second mortgage by using funds for the following:
- New business start-up costs
- Purchasing a new office or equipment
- Purchasing an investment property
- Operating capital
- Buying out partners
- Commercial, industrial, or land loans
- Consolidating debt
7. Same quick process as a first hard money mortgage
When you use a hard money loan to secure a mortgage for the first time, you can get funding in as little as 10 days.
If you went the route of using a traditional lender and a HELOC, you could be looking at a 30-45 day closing. Hard money lenders are known for their expediency and easy process, allowing you to quickly access the funds you need.
8. Same easy approval process
The reason that hard money lenders are so quick is that they don’t require the same documents and information from all of their applicants, as banks do.
They will want to know the property address and a short submission story. You’ll also need a plan for how you’ll pay back the loan. Other than that, hard money lenders such as Marquee Funding Group examine deals on a case-by-case basis, so documentation requests will vary.
Secure a second mortgage with hard money
Obtaining a second mortgage can be beneficial for borrowers in a variety of different ways. Reasons for needing a second mortgage are often complex, and hard money lenders thrive in unique scenarios.
The greatest benefits of using a hard money lender for a second mortgage are speed and flexibility. Marquee Funding Group offers same-day approvals and can close on a deal in as fast as seven days.
Marquee Funding Group also offers the following:
- Common-sense underwriting
- Loan amounts from $50,000 to $20 million
- Purchase money, rate-and-term refinance, and cash-out refinance options
Submit your loan scenario today to start working with Marquee Funding Group.
Photo by Nikola Knezevic on Unsplash