Finance

How to Get a Second Mortgage With Bad Credit

By Tom Burchnell

When you’re a homeowner, you have a lot of money tied up in your home in the form of equity. This money could be utilized to renovate your home, fund a new business, or consolidate your high-interest credit card debt—you just need a way to access it. 

One way you can unlock some equity is by taking out a second mortgage. However, qualifying for a second mortgage can be tough if you have bad credit. 

Below, we’ll explain how you can improve your chances of qualifying for a second mortgage with bad credit. We’ll also provide some worthwhile alternatives. 

What Is a Second Mortgage?

A standard mortgage is simply a home loan that uses your property as collateral. So, then, what is a second mortgage? It’s any type of loan that’s secured by your home, in addition to your original mortgage. Generally, a mortgage lender will only allow you to borrow up to 80% to 85% of your home’s equity with a second mortgage. 

Some common types of second mortgages include:

  • Home equity loans – A home equity loan is an installment loan. It allows you to borrow a lump sum of money from your home’s equity. Once you receive a home equity loan, you must make periodic payments on it for a set amount of time. Compared to most credit cards and other types of loans, home equity loans often have much lower interest rates. 
  • Home equity lines of credit (HELOC) – A HELOC is a revolving line of credit that allows you to borrow money each month from your equity up to a set amount. At the end of the month, you’ll have to repay the amount you borrowed, plus interest. Many people use their HELOC for home renovations or to pay off debt. But many people find themselves using HELOC to pay off mortgage. This option is often confused with a home equity loan, however, there are some important differences between a home equity loan vs. HELOC.

With both types of second mortgages, interest payments may be tax-deductible.

Second Mortgage Eligibility Requirements

To qualify for a second mortgage, you usually need to:

  • Have at least 15% equity in your home
  • Be up-to-date on your primary mortgage payments
  • Have a debt-to-income ratio of 43% or below
  • Have a verifiable income from the past two years
  • Have a credit score of 620 or above (though some lenders require an even higher credit score)

Your credit score plays a vital role in your second mortgage eligibility. If you have a problematic credit score, there are some workarounds though it can be a lot harder to find a mortgage lender that will approve your application.

How to Get a Second Mortgage With Bad Credit

While your credit score is important, it’s not the only factor that lenders use to determine your second mortgage eligibility. 

You may be able to compensate for your bad credit by having a:

  • Low debt-to-income ratio
  • High monthly income
  • A substantial amount of equity in your home

Even if you meet these specific criteria and get approved for a second mortgage, there’s a good chance your lender will charge you a higher interest rate to account for your bad credit. 

Tips for Getting a Second Mortgage With Bad Credit

You can undoubtedly improve your chances of getting approved for a second mortgage by:

  1. Paying down your debt – Paying off debt can decrease your debt-to-income ratio and strengthen your second mortgage application. 
  1. Fixing any mistakes on your credit history report – It’s possible that your credit report has some errors on it that are dragging down your credit score. By disputing these errors with the credit bureaus, you can easily bring your score back up. 
  1. Taking steps to improve your credit score – The best way to overcome the limitations of bad credit is to improve it. You may be able to increase your credit score in a matter of months by: 
  • Making timely credit card payments
  • Paying off any debts that have gone to collection agencies
  • Avoiding any new credit applications
  • Becoming an authorized user on someone else’s credit account (as long as they have excellent credit)

Second Mortgage Alternatives for Bad Credit

If your goal is to extract cash from your home’s equity, a second mortgage isn’t your only option. 

Here are some alternatives worth considering:

Cash-Out Mortgage Refinance

Cash-out refinancing is when you replace your original mortgage with a new mortgage for a larger loan amount. In doing so, you can pocket the difference and use this cash for other purposes. To qualify for this type of financing, you usually need a substantial amount of equity in your home.

Reverse Mortgage

If you’re 62 or older and have at least 50% equity in your current home, you may be eligible for a reverse mortgage. This type of equity loan lets you liquidate some of your home’s equity in the form of a monthly income stream, a line of credit, or a lump sum. Best of all, there’s no credit score requirement. This is also an option if you’re wondering how to lower mortgage payments without refinancing

With a reverse mortgage loan, you don’t need to make any mortgage loan payments. In turn, your mortgage balance will increase as time goes on. For this reason, a reverse mortgage isn’t a great option if you ever plan on moving out or leaving your home to someone as an inheritance. There are also other reverse mortgage cons to consider before you go with this option.

Streamline Refinance

If you have an FHA loan, you may qualify for streamline refinancing. This type of refinancing doesn’t require a credit history check or any income verification, which means you can get a loan without income proof. You just need to be current on your mortgage payments. 

Since there’s less paperwork involved, streamline refinancing can help you reduce your interest rate or monthly payment amount faster than other types of refinancing. However, it only allows you to unlock up to $500 cash from your home’s equity.

Sale-Leaseback Programs: An Even Better Alternative

Another way you can convert equity into cash is by choosing a sale-leaseback solution. 

With sale-leaseback programs, you sell and then lease your home for as long as you want to. The best part – a bad credit score won’t stand in your way from converting your equity into cash. 

To learn more about our innovative sale-leaseback programs, reach out to a financial expert.

Key Takeaways

If you’re looking to get a second mortgage with bad credit, it’s important to know the requirements and what alternatives are available to you. Talk to a financial advisor to figure out what solution might be best for you. Looking for more information on home mortgages? Explore our blogs on how to get out of a mortgage and the pros and cons of mortgage forbearance.

Topics:
Bad Credit
Debt
Mortgages
Second Mortgage
Written by Tom Burchnell
Director of Product Marketing
Disclaimer

This article is published for educational and informational purposes only. This article is not offered as advice and should not be relied on as such. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process. EasyKnock is not a debt collector, a collection agency, nor a credit counseling service company.